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Wednesday, June 23, 2010

Should Indian Government Deregulate Fuel Price?

(Published at Eastern Chronicle on 23rd of June-2010)
In the pace of ongoing rise in global crude oil prices, the Petroleum Ministry on 31 May, 2010 pitched for deregulation of fuel prices. As a first step towards decontrolling fuel prices, Indian government on 1 June allowed state run oil companies, ONGC and IOC to determine the retail prices for auto fuel at par with international market prices.

This is not the first attempt by the government to de-regulate fuel prices. In April 2002, the government dismantled the administered price mechanism allowed free pricing mechanism for petrol and diesel but when crude oil prices began to increase in 2004 and oil companies wanted to increase the prices government again interfere and halted the free pricing of petrol and diesel.

Deregulation debate

To keep pace with the global price trend another fuel price hike may be imminent when cabinet ministers meet to decide India’s fuel policy next week. How long will Indian government keep a tight control on the prices of petrol and diesel? When wills our policy makers recommended that this is the right time to free petrol and diesel prices and let free market forces takeover. If the price will cross above $100 mark our political class will say that to wait till price come down, but we saw what happened when price came down there was no action.

Due to global rising trend and continued extension of subsidies on petrol, diesel, LPG and kerosene the losses of the state owned oil companies will sky rocked and expected to suffer losses worth Rs.1 Lakh crore in 2010-11. Currently, petrol is sold Rs.6 a litre below its actual price, while diesel pricing is subsidized by over Rs.7 per litre.

Now the question arises if the deregulation is good then what are the reasons and why? As per the Prime Minister appointed Kirit Prakash committee report demand for fuel will increase day by day and if the fuel price not deregulate the burden of subsidy will increase and the loss of PSU`s will also increase. The committee recommended a hike of Rs.100 a domestic LPG cylinder, Rs.6 a litre for kerosene, Rs.4.72 a litre for petrol and a rise of Rs.2.33 a litre for diesel.

The Petroleum Federation of India, the apex body of public and private oil firms recommended complete decontrol of the fuel prices because currently public sectors retailers sell auto fuel at government subsidize rates, which private sector competition is unable to match with high crude oil prices.

Government should allow the fuel prices to be decided based on the demand and supply and international market rates. The imbalance in demand–supply and increase in prices always bring more innovative products like Bio-Fuels and other fuel saving technologies, which are dire need for the nation.

But another school of though says that instead of deregulating the fuel prices the government should introspect the real cause and priotize the usage to effective control. The competition in the market is limited for competition among the players, in the monopoly type the price will set to rise. Also, the inflation is slated to rise in a spiral fashion and burden will go on common man which is the working class of India and biggest tax payer. Government should spend more money on oil exploration and encourage private participation to the fullest which will help government can regulate the oil prices as per the common mans budget.

Pre-requisites for de-regulation

Stability in Crude price – Stability in crude prices is a prime requirement for successful implementation of price deregulation. But in the last year sharp correction in crude oil prices from $147 per barrel to a low of around US $32 per barrel and government might follow the wait and watch policy before taking a stand over price de-regulation.

Stable and reform oriented government – Inspite of being a stable government in India, the UPA is coalition government with the DMK and TMC as its key allies. With elections likely to take place in some state or the every year, complete de-regulation without the price bands is quite unlikely.

In conclusion we can say that major reforms is required to protect the state run oil companies and if necessary governments should taking a decision on freeing petrol and diesel prices.