It appears to have been a planned manoeuvre. Not having got adequate traction from the Rangarajan Committee report on the pricing and taxation of petroleum products and not wanting to lose the opportunity of pushing ahead with petroleum price decontrol under a government not dependent on Left support, UPA II set up an Expert Group chaired by former Planning Commission member Kirit Parikh.
The committee's clear mandate was to examine the pricing policy for four sensitive petroleum products (petrol, diesel, PDS kerosene and domestic LPG) and recommend a viable and sustainable pricing strategy for these products.
The composition of the committee suggested that it was expected to recommend wholesale liberalisation of the pricing of petroleum products.
The Expert Group did not disappoint, and delivered its recommendations in five months.
What is surprising is that the Government has decided to accept most of the committee's recommendations and hike the prices of petrol, diesel, kerosene and LPG, opt for price decontrol for petrol immediately and announce that a similar transition would follow for diesel in the not too distant future.
Surprising move
The move is especially surprising because persisting inflation is already a major cause for concern. The Wholesale Price Index (WPI) figures for May pointed to three worrying trends. First, for the fifth month running, the aggregate annual rate of inflation as reflected in the month-on-month increase in the WPI was near or well above double-digit levels.
The figures for May put inflation at 10.2 per cent over the year. S
econd, the current inflation is particularly sharp in the case of some essential commodities, as a result of which the prices of food articles as a group have risen by 16.5 per cent and of foodgrains by close to 10 per cent. Finally, there are clear signs that what was largely an inflation in food prices is now more generalised with fuel prices rising by 13 per cent and manufactured goods prices by 6-7 per cent.
The immediate and near-term impact of the oil price decisions would be an aggravation of these inflationary trends focused on essential commodities that currently burden the common man. Petroleum products are consumed in some measure by all. Given the fact that these products are universal intermediates, entering into the costs of production of a number of goods and services, the cascading effects of the price hike on the costs and prices of a range of commodities is likely to be significant.
With prices of essentials already on the rise, the move threatens a return to the days when inflation was a major economic problem faced by the country. It follows, therefore, that this is the worst time for hikes in and the decontrol of the prices of petroleum products.
Under-recoveries
The Government claims that this was unavoidable because of the “losses” being suffered by the oil marketing companies (OMCs). When the domestic prices of oil products are controlled but the price of imported oil is rising, oil marketing companies receive from the consumer less than what it costs them to acquire the products they distribute.
This leads to what are termed “under-recoveries”, which would affect the accounts of the OMCs (Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation and IBP) that obtain their supplies of petrol and diesel from the refineries at prices that equal their import price inclusive of customs duty.
According to estimates, if retail prices had not been raised under-recoveries by the oil marketing companies would have exceeded Rs 70,000 crore in the current fiscal year. Since this is unsustainable, it is argued, the hike in prices and a shift out of a controlled pricing regime is unavoidable.
The Government's argument is by no means watertight. While under-recoveries are a reality, they do not turn oil refining and marketing firms into loss-making enterprises, because those firms deliver a range of products and services, the prices of all of which are not controlled.
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