Let petrol prices remain free
New Delhi 12-Oct-2012
The Government still has the last word on petrol pricing, leading to fears that oil refiners may go the Air India way.
One cannot blame IndianOil Chairman R.S. Butola for feeling let down by the Union Government’s fuel pricing. After all, it must be exasperating for the country’s largest oil refiner to be gasping for survival, thanks to an ad hoc policy where compensation for fuel losses is often delayed and inadequate.
Little wonder, therefore, that Butola believes that enough is enough and the time has come to bring petrol back under the original administered pricing mechanism (APM). Simply put, it means that it will cease to be a freely priced fuel, as is the case now. Petrol was knocked off the APM list in June 2010. The Government had then decreed that IndianOil along with its refining counterparts, Hindustan Petroleum Corporation and Bharat Petroleum Corporation, would have complete autonomy in fixing its price.
Up to oil companies
Since then, petrol has become dearer by nearly half keeping in line with global prices. The IndianOil Chairman has a right to be miffed, though. The Government had a big say in keeping petrol prices stifled for some months towards 2011-end and even more recently this year, because a hike would have been a damaging both politically and economically. The refiners were outraged, because while their losses (on petrol) were piling up by the hour, there was no scope of any compensation. After all, it was out of the APM ambit, at least on paper, even though the Government was still having the last word on its pricing. Since then petrol prices have been hiked and prompted the expected outrage from political parties, but Butola is right in saying that it is up to the oil companies to decide the way forward. If they do not have this privilege, the Government may as well hold the baby for life. To that extent, there is no question that the IndianOil chief is spot on in questioning these double standards.
For the record, Butola’s counterparts in HPCL and BPCL are opposed to any move in regulating petrol prices all over again. They know what it is like to live in an APM regime, the results of which are so evident when it comes to diesel, cooking gas and kerosene. Finally, it is the Government that decides when price hikes of these fuels ought to be implemented even while losses (on sale) are reaching staggering levels. The net result is that borrowings of the three oil refiners are now hovering around Rs 1.5 lakh crore and are on a dangerous spiral upwards. There are fears that they may even go the Air India way if the status quo continues.
Unwise
Against this background, it would not be the wisest of decisions to get petrol back under price control. By and large, the three oil companies have had a free run in deciding its prices at least for the first two years since it was decontrolled in mid-2010. It was only when world crude oil and product prices started getting out of control did the Government think it fit to intervene.
These two years of relative freedom, even for a single product such as petrol, have been absolutely liberating for IndianOil, BPCL and HPCL, because they have had to wait for nearly 15 years to get the process started in right earnest. It was in the mid-1990s when (the then) Petroleum Secretary Vijay Kelkar kicked off the roadmap for fuel pricing when U. Sundararajan, the chairman and managing director of BPCL, was entrusted with the task of preparing a detailed report. The verdict was unanimous: free prices across the board for all fuels, and let the oil companies decide the way forward.
Diesel dream
Needless to add, the Government did not quite share this view, and it took several committees thereafter to finally arrive at a decision on petrol in 2010. There was also a broad hint that it was only a matter of time before diesel would also be deregulated, but this seems a pipedream today especially in the context of inflation and the relentless spurt in global prices. Yet, the oil companies are hopeful that diesel prices will be freed eventually. Cooking gas has already been partially deregulated with the cap on subsidised LPG cylinders to households.
Criticism
IndianOil may now have to do a rethink on its stance on petrol and thank its lucky stars, instead, that the management has some breathing space with at least one fuel. Sure, the Government’s arbitrary policies can be annoying, but it is still a step forward at the end of the day. After all, it is only a little over two years into a market-pricing regime, which means coping with a new set of challenges. Getting back to the APM era will only end up being a regressive move and a poor reflection of a company’s confidence in its capabilities.
Critics would still be absolutely justified in asking why IndianOil, HPCL and BPCL have so often in the recent past ensured that price changes in petrol happen in tandem. Free pricing should not translate into cartelisation, they argue quite rightly.
This has also caught the attention of the Competition Commission of India, which perhaps explains why petrol pricing is no longer being done in sync.
Similarly, observers wonder why IndianOil, HPCL and BPCL have not had the courage to hike petrol prices when they were losing big money in 2011-end. After all, they are obligated to do so and protect the interests of their shareholders. How can they deliberately turn a blind eye to losses? This is legitimate criticism, except that the Government is the major shareholder in these three companies, which means that even freedom has its limitations.
Oil cos capable
There is no question that fuel pricing is a difficult exercise in a country where income inequalities are so profound and disturbing. It is downright nauseating to see rich owners of cars and SUVs making the most of subsidised diesel along with the poor farmer who is struggling to stay alive. Despite this, the Government should gradually hand over this responsibility to the oil companies. They have their share of bright people who understand what it takes to strike the balance between meeting a social commitment and remaining viable in the business.
