Pricing haze continues
The increase in prices of petrol and diesel seems to have been imminent given the steep increase in the international price of crude oil. However, the haze surrounding the whole issue of petroleum product pricing remains as dense.
Take a look at recent history. Prior to this increase, there were two price revisions, announced by the government in June 2005 and in September 2005 - the former after a gap of almost seven months, when international prices increased by a staggering 47.3%. That increase saw HPCL almost wiping out its losses and IOC registering a healthy profit in the second quarter of 2005-06. However, the gap of nearly three months between June 2005 and the September price revision saw HPCL and BPCL moving deeper into the red, while IOC was barely breaking even. With the September increases and some favourable international price movements, ONGC and IOC registered healthy profits by the end of 2005-06 and other oil companies closed the year in the black. The international price of oil was a little less than $45 in March 2005 and in March 2006 the price was $63. So, how did oil companies manage to do this? How could relatively modest price changes in the controlled products have such dramatic end-results?
The answer probably lies in the way the import price formula was specified in the first place, that allowed both the oil companies and the government to have a comfortable cushion in the aggregate, even though a product by product picture of the controlled items gives an illusion of huge losses.
Apart from the public sector oil companies making a reasonable profit in the aggregate, the net earnings of the central government from the oil sector in 2005-06 on account of excise earnings and dividend received amounted to Rs 33,000 crore. The trade parity formula proposed by the Rangarajan committee is probably just a wee bit more rational than the import parity pricing formula. However, the government needs to decide its public policy objective in pricing petro products and make transparent the build-up of petroleum prices and revenue transfers as part of the people's right to information.
Leaving the prices of kerosene and LPG untouched can also be seen as a conservative measure, given that 75% of the LPG subsidy benefits urban consumers and 40% is enjoyed by the top 6.75% of the population. The increased differential between kerosene and diesel prices can only be expected to increase the diversion of kerosene into adulteration - estimated at 40%! Finally, a refocus on cost of service delivery than on fuel prices may result in more efficient development choices for India.