Fuelling the public

It is difficult to understand why the Indian public was partly unprepared for the increase in the price of diesel and petrol effected by the government this month. It is, of course, another matter that some political parties would have opposed the move anyway, because they need to maintain consistency in their well-established stands on these matters and would not be willing to lose faith of their constituents, who have become accustomed to irrationally low prices of oil products irrespective of what the country has to pay to import oil.

To a large extent, the government of India has handled this decision rather well, having provided a clear indication in advance of the move. Also, well-conceived has been the subsequent step of getting the government of Maharashtra to moderate sales tax on petroleum products, a step that is likely to be followed by other states. This allows the government the benefit of not having to resile from its decision by rolling back the price increase and yet ensuring that the slight decrease in prices on account of reduction of state level sales tax is received by consumers as a concession in response to their demands.

It is important to remember two major issues in relation to this price increase and even more importantly the decision announced by the government that in future petroleum products prices would be changed by the oil companies themselves. If we look at petroleum product prices in neighbouring countries, we find that countries with lower levels of income are more responsible and enlightened in accepting the harsh reality of expensive petroleum products.

While in May this year, kerosene prices in Delhi were a little over Rs 9 per litre, the equivalent price calculated in Indian rupees was over Rs 26 in Pakistan, Rs 19 in Bangladesh, around Rs 17 in Sri Lanka and almost Rs 30 in Nepal. Similarly, the cost of an LPG cylinder in Nepal was almost twice that in Delhi and almost 80 per cent higher in Pakistan, 20 per cent higher in Bangladesh and 60 per cent higher in Sri Lanka. Despite this situation in our neighbourhood, kerosene and LPG in India continue to be treated as holy cows, the prices of which are not to be touched.

To this extent, the government’s announcement opens up the possibility of a more rational system. This would install the system that was proposed to be implemented in 2002 after complete dismantling of the APM. Rightly, therefore, the government would divest itself of taking decisions on petroleum product prices.

The price increase brought about now will still not cover the gap between the price of crude oil and the revenue received by oil companies. Consequently, the government will still continue to accept part of the burden by issuing bonds for a substantial sum, in excess of Rs 28,000 crore.

To insulate its economy from possible oil shocks in the future, India must ensure that dependence on oil imports is reduced. As long as the government subsidises oil product prices, there is no hope of efficiency improvements or conservation measures taking effect. There is need for the country not only to develop alternative sources of liquid fuels, such as those produced from biomass but also to ensure that the efficiency of the transport system is improved through introduction of energy-efficient vehicles and greater use of public transport. The share of passenger as well as freight transport has been moving from rail to road. This trend needs to be reversed by improving the railways.

It was a quarter century ago that the Indian government received the report of the National Transport Policy Committee. Since then, no fresh effort has been made to provide an overall transport policy for the country, which needs to be based on projections of future prices and growth in demand driven by realistic assumptions of economic growth. Any such overall assessment would reveal that we need to give shape to a different structure of the transport sector which provides for greater role for coastal shipping, inland water transport and a faster and more efficient railway system. Subsidised pricing of transport fuels will not provide any signals for a move in that direction. Nor would a subsidy on kerosene remove the curse of widespread adulteration and ensure benefits flowing to those genuinely in need.

Oil product pricing must reflect international market realities if we are to reduce our future dependence on oil imports and ensure energy security. One hopes that the recent decision on increasing prices of petrol and diesel are the first of many steps that need to be taken to safeguard our energy future.