Pump-pricing

Union Petroleum Minister Murli Deora has finally responded to pressure from within the Congress and discussed the timetable for reducing the prices of petroleum products.

Union Petroleum Minister Murli Deora has finally responded to pressure from within the Congress and discussed the timetable for reducing the prices of petroleum products: he has indicated that a cut cannot take place immediately, because the election commission8217;s model code of conduct bars potentially vote-winning policy measures from taking place when assembly elections are on. After Christmas Eve, though, the last day of polling in Kashmir, the Centre is free to reduce prices; and Deora seems to have implied that such a reduction might, in fact, take place.

On one level, it could be argued that such a cut is overdue. After all, the prices were raised in response to oil that seemed on the point of touching 150 a barrel; the price of a barrel of sweet crude is now averaging a third of that, at around 53, and was as low as 44 for India delivery on Friday. Other countries with similar political constraints have cut prices 8212; Malaysia has cut prices five times. Inflation has moderated slightly, but is still high: getting it a little lower, as would happen following a price cut, might help banks rationalise interest rates as well, and provide even more 8220;room8221; for a rate cut, as Finance Minister P. Chidambaram would put it.

The government had earlier said that if prices dip below the low 60 per barrel, a cut would be affordable; but Deora has delayed cutting prices so far, partly no doubt because the accumulated 8220;under-recoveries8221; 8212; the losses to the exchequer and the oil marketing companies 8212; have become so large. In addition, the many long-term arguments for higher oil prices, and a more rational distribution for subsidies, have been heard so often recently that we can hope that they have begun to carry more weight with policy-makers. That being said, it is difficult to deny that the politics of the situation make a cut inevitable and understandable: the pressure at this time on the government to pass the benefits of lower international prices on to the consumer is overwhelming. However, there is every reason to use this situation to moderate the discretionary aspect of domestic oil prices. A transparent, credible mechanism for raising and lowering prices in accordance with external volatility, something that permits reasonable profits while allowing the middle class some relief, and the ability to plan for the future, is something India desperately needs 8212; and it should be set up while world prices are low, not while they are high.