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High is better

There is currently discussion on abandoning the administered price mechanism in petro-products in India.

Written by Suyodh Rao |
June 4, 2009 4:38:48 am

There is currently discussion on abandoning the administered price mechanism in petro-products in India. The last time this was considered was in January this year. The motives for such contemplation by the government then and now are quite different. Global crude prices today are at a level where retail prices will have to be raised should there be price deregulation now; then,retail prices would have been lowered.

Price increases never have support or sympathy in a democracy. That in itself doesn’t make them wrong. Ending the era of subsidised energy is in the long-term interests of the nation.

In early 2009,the price of crude was in the region of $40 a barrel,and the country and many states were looking at having to face their electorates within the next quarter. Abandoning the administered price mechanism at that time would have meant a drop in retail prices that could have helped the ruling party at the polls. Good sense prevailed and the move was shelved.

It made good sense then because lulling citizens into a false sense of security by lowering prices would have led to mistaken decisions by them. It would have promoted the belief that energy is more abundant,whereas nothing can be further from the truth.

Today,the price of crude has since gone up to $66-plus a barrel. That’s a whopping 65 per cent increase in less than half a year. The motive this time round is apparently that the government is anxious that global prices are stiffening and does not want to find them where they were in 2005-2008,when prices moved from $55 to $147,the last $70-increase coming suddenly.

The oil marketing companies (OMCs) began carrying the burden of the increase. They were helped out by oil bonds worth Rs 60,967 crore,a burden that stubbornly remains on the government’s books,limiting its scope to carry out other welfare or stimulus measures.

Given the much-hyped fiscal stimulus,any additions to the fiscal burden are highly avoidable. Thus the desire to free prices is born of the desire to be free of the responsibility to keep petro-products’ prices artificially low should international crude prices go up for whatever reason — geopolitical,supply constraints or the unlikely event of a global demand revival.

Such a desire is understandable if you put yourself in Murli Deora’s shoes back in mid-2008. OMCs were seeing rising losses every day; and were no doubt demanding,daily,that the government let them raise retail prices. Deora’s attempts to do so were opposed tooth and nail by the communist parties whose support the government required on the floor of the house; his pleas to P. Chidambaram for customs duties reductions on crude were squarely turned down. So,naturally,we got rationing. OMCs curtailed supply; diesel-powered private vehicles could get no more than five hundred rupees’ worth of the scarce liquid. OMCs threatened to cut supplies to rural areas. Car-drivers on highways found themselves at the mercy of black-marketers. How did Deora sleep at night?

Regardless of the government’s motive,moving away from an administered petro-product price mechanism that places the burden of subsidies on the Indian fiscal system is to be lauded. The reason being that this burden is shared equally by one and all while its beneficiaries are not the least privileged sections of society by any means.

If the opposition’s intentions are to buffer the common man from high petroleum prices,then innovative,better-targeted measures for alleviating their woes have to be figured out by them and the government,jointly. Giving an identical,universal subsidy to the users of 6-cylinder gas-guzzlers and a motorised cycle-rickshaw is surely not the way. Better ways exist.

In fact,a floor for crude prices seems to be the best option for any government,the world over. That way,alternative energy producers know they will have a stable floor to the price regime they are taking on. Else,resources will not flow into that sector at the pace they should. We have witnessed this already: venture capitalists globally were regretting their investments and bets on alternative energy start-ups when oil prices crashed from their mid-2008 highs of the $140s.

Global crude output has not exceeded approximately 86 million barrels per day since 2005,despite escalating prices. Globally we are probably at peak oil availability. The sooner we learn to make do with less energy,and the more we foster efforts to harness renewable sources of energy,the better-off

India will be. Free,if higher,petro-product prices will help us get there sooner than subsidised low ones. The process of getting there on our own terms,today,is less painful that being forced to get there by the world market via sudden,rapidly rising prices.

The writer analyses macroeconomic and energy risks for Hyderabad-based ValueLabs

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