The long wait and after
For the second time in less than two months, the government has reduced the retail prices of petrol and diesel, and the margin is the same as on the previous occasion — Rs.5 and Rs.2 a litre respectively. The price of cooking gas, which was left untouched in the revision made on December 5, 2008, has been cut by Rs.25 a cylinder. The successive reductions were not unexpected given the sharp fall in the international oil prices to less than a third of their peak level of around $147 a barrel touched in June-July 2008. The price of India’s average crude basket, currently around $44 a barrel, has come a long way from its unprecedented high of above $140 that prevailed just seven months ago. With petroleum prices hovering just above $40, the public sector companies have not been complaining about “under-recoveries,” a term loosely interpreted as revenue loss arising out of selling products below their cost. After incurring combined losses of Rs.14,431 crore during the first half of the year, they have now bounced back, reporting a positive margin of Rs.20-25 crore a day. Their under-recoveries from LPG and kerosene are being offset by profits from the sale of petrol and diesel.
The recent price revisions will necessitate a relook at those calculations, but the price cuts could not have been postponed indefinitely. Oil prices, having touched the bottom are firming up, although no one is sure which way they will move over the medium-term. The under-recoveries on account of petroleum products may turn out to be less than half the original estimate, but the government still needs to bear a burden of approximately Rs.20,000 crore. That would increase the size of the Central government’s fiscal deficit, which the Prime Minister’s Economic Advisory Council has recently estimated at 8.0 per cent of the GDP for 2008-09. Besides, the economic slowdown has already resulted in lower tax collections. Instead of resorting to ad hoc price revisions, the government would do well to grab the opportunity presented by the unexpected fall in oil prices to put in place a rational system of petroleum pricing with open and transparent cross subsidisation of petrol, kerosene and cooking gas as warranted. In August last year, when the oil prices were high, B.K.Chaturvedi committee had made far-reaching recommendations, which if implemented would pave the way for an equitable methodology of pricing petroleum products. The report has greater relevance now than when it was presented and, one hopes, the government will draw up an action plan based on its recommendations.
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