More patchwork

Every time there’s a surge in oil prices, or uncertainty about supplies (such as when the US decided to invade Iraq), the Cabinet clears a plan to develop strategic reserves, to tide over a sudden blip in prices or a temporary supply shock.

Over the years, however, the strategic reserve has never got built up for want of answers to the obvious questions: who is to fund the creation of storage space and, more importantly, who will pay for the 90 days’ worth of petroleum products that are to be kept as a strategic reserve?

Till now, the view has been that the oil companies could be asked to bear this cost, but with the companies staring at a loss of Rs 40,000 crore this year if prices are not raised to market prices, this is clearly a non-option.

Indeed, since the investment plans of these companies are also going to be hit, with the resultant impact on oil self-sufficiency levels, there is little doubt that the government’s inaction on the price front has compromised the country’s energy security.

So it is a matter of relief, even from a perspective that is quite different from that of market economics, to see that the Prime Minister has belatedly promised a price revision.

Till now, the favourite argument used by the petroleum minister, Mani Shankar Aiyar, and the government’s allies on the Left was that the finance ministry (in Delhi as well as in various state capitals) was the villain of the piece as the pre-tax price of petrol is only about half of the retail price, the balance being various taxes such as excise, import duty and sales taxes; for diesel, the tax component is about 40 per cent.

These tax levels are high, and there has been a strong argument for switching from an ad valorem duty structure to a combination of ad valorem (that is, percentage of price) and specific duties (based on quantity, not price), so that the government does not get windfall gains whenever oil prices rise — at the cost of the consumer.

It would of course have made the petroleum minister’s argument more convincing if the complicated cross-subsidies in oil pricing had been made transparent, but he has not done his part of the job.

Faced with its own pressures to show adherence to fiscal deficit reduction targets, the finance ministry explains its reluctance to do the needful for the oil economy by pointing to commitments on additional expenditure, building up in five years to Rs 40,000 crore per year, because of schemes such as the rural employment guarantee programme.

It is also pertinent that tax collections from the oil sector have begun to level off. Some part of this, clearly, is due to the lower advance tax payments by oil firms (only ONGC paid this), while another reason is the lowering of duties.

The even more important reason, perhaps, is the petroleum ministry’s report that there has been a 9 per cent fall in diesel consumption in this year’s first quarter, while petrol consumption has remained static. Given how economic growth has been strong, the drop in diesel consumption is hard to believe.

What this indicates is increased adulteration of diesel with subsidised kerosene. In other words, apart from hitting the oil companies, the unchanging petroleum prices and the differences in the prices of kerosene (Rs 8.40-9.30 per litre in the four metros) and diesel (Rs 26.28-32.83 per litre) have begun hitting the exchequer as well.

The Cabinet will probably decide this week to raise the prices of petrol and diesel, and (going by past form) will leave the price of kerosene untouched. This will solve some problems, and it will make other problems more acute.

It seems too much to expect this government to use the occasion to clean up the mess created by multiple and conflicting objectives, and by the politicians’ and bureaucrats’ reluctance to understand that markets for petroleum products in much of the world are free from messy controls, and can be made free here as well.