Opinion Decontrol further

Deregulation of diesel prices isn’t enough. Now open up to all players, address LPG subsidy

October 20, 2014 12:13 AM IST First published on: Oct 20, 2014 at 12:13 AM IST

Narendra Modi’s government has taken its first major reform decision by announcing the decontrol of diesel prices, which will henceforth be market-determined. Admittedly, this wasn’t a politically difficult call, given the softening trend in international oil prices. In the last three months, the average cost of crude imported by Indian refiners has dropped from over $ 105 to under $ 83 a barrel. This has led to retail prices of petrol — which are already decontrolled — falling by roughly Rs 7/ litre since July. Consumers will similarly benefit now from diesel decontrol, with state-owned oil marketing companies (OMCs) reducing prices by Rs 3.5 a litre from Sunday. But decontrol is a double-edged sword, as consumers need to also be prepared for the consequences of any renewed spike in global crude prices or a weakening of the rupee.

The Modi government must be credited, therefore, with going for decontrol rather than playing safe by persisting with administered pricing.

But merely giving OMCs the freedom to fix retail prices based on import parity costs isn’t enough. Genuine decontrol requires imports of petrol and diesel being opened up to all players, including standalone fuel retailers who may not mind incurring “under-recoveries” (which are only notional and do not always imply losses).

The current rule that gives only OMCs or those with refining/ exploration operations in India the right to market transportation fuels needs to go, so that consumers benefit from (or pay for) real decontrol with competition. Also, having eliminated under-recoveries in diesel that amounted to Rs 62,837 crore in 2013-14, the government needs to target the Rs 77,000 crore-odd subsidy on cooking fuels next. It should do this by making all consumers pay the market price for LPG and kerosene, and transferring the difference with any subsidised rate directly into the bank accounts of beneficiaries. The latter must be carefully identified, to include only low-income or vulnerable households deserving of subsidy.

Where the government has really played it safe is in its new domestic gas pricing policy. By removing any link with imported liquefied natural gas (LNG) prices that was part of the earlier Rangarajan Committee formula, domestic gas producers have been granted a modest price increase from $ 4.2 to $ 5.6/ mmBtu. A country that meets a third of its gas requirement from LNG imports at $ 13-14/ mmBtu needs to incentivise domestic exploration and production activity. The new pricing formula is unlikely to serve that objective.