Petro potion tickles & rattles
- Radical proposals to raise prices leave govt with unenviable option

The Manmohan Singh government has been served a chalice of petroleum reforms too bitter to swallow politically but irresistible economically.

Transportation and kitchen fuel prices could rise if the government marshals courage to accept the sweeping recommendations made by a committee that suggested market-determined pricing of petrol and diesel, an increase of Rs 100 per cooking gas cylinder and a Rs 6-per-litre hike in the price of kerosene sold through ration shops.

“The current petroleum product pricing of the government is not sustainable,” said Kirit Parikh, chairman of the committee, after submitting the report today to petroleum minister Murli Deora.

Deora later said the Parikh report would be placed before the cabinet for discussion within a week. “We are very keen not just to discuss (the report) but also see what can be done for consumers and the government,” Deora added.

Parikh believes that the government, which is under pressure to put a lid on rising subsidies, will be receptive to the radical proposals. (See chart)

“This is the best time to free prices of petrol and diesel. The price increases will be very low now…. You ought not to wait for crude oil prices to touch $120 a barrel,” he added. Crude oil prices are currently hovering around $76 a barrel.

Industry sources said the price of petrol could go up by Rs 4.70 per litre and diesel by Rs 2.30 per litre if the government grants pricing freedom to the state-owned oil marketing companies like Indian Oil Corporation.

The economics may be right but the proposals have come at a time the government is battling price rise in a year elections will be held in Bihar.

Analysts expect political pragmatism to override economic wisdom, prompting the government to adopt only a few token measures.

“The government has to bite the bullet sometime but the quantum of the increase may not be as much as suggested by the panel,” said D.K. Joshi, economist with rating agency Crisil.

Political parties said they would oppose any move that raised the prices of essential commodities.

“We are confident that the government would keep the larger picture in mind while arriving at an appropriate decision,” said Congress spokesperson Manish Tiwari.

The government, which rode to power on the populist aam admi plank and the slogan of inclusive growth, will be hard pressed to raise the price of kerosene sold through the ration shops which hasn’t been changed since March 2002.

The committee felt that a price of Rs 15 per litre was justified as 35 per cent of kerosene sold through the ration shops was being diverted for unauthorised purposes including adulteration of diesel.

The committee believed that an inflated fuel bill for motorists – estimated at a maximum of Rs 1,000 a month for car owners based on an all-India average of driving distances and assuming global crude oil prices surge to $120 a barrel from current levels – is entirely bearable. People who live in the metros may have to pay somewhat more.

The more realistic medium-term assumption is that car owners in metros should expect a Rs 7 per litre hike in petrol prices, which would translate into a little over Rs 600 increase in monthly petrol bills if crude oil prices stay under $80 a barrel.

In the case of two-wheeler owners, the committee says the additional increase will be only Rs 50 a month (on the basis of an all-India average of driving distances and fuel efficiency standards) or Rs 80 a month in metros.

In the unlikely event that crude prices surge to $ 120 a barrel, the two-wheeler owners will have to pay just Rs 160 more every month – which it reckons isn’t going to be hard on the pocket.

The committee also said that there was no social reason to subsidise gas-guzzling sports utility vehicles (SUVs) and, therefore, proposed diesel prices should also be market determined.