Half way there

Reports of what the Rangarajan Committee on petroleum pricing has recommended indicate that, while the committee has come up with some good suggestions, it has not gone far enough in providing a recipe for fixing the problems of the oil sector. Instead, the committee has tried to look for technical fixes in a situation where it knows that there is no will to de-politicise petroleum pricing and thereby to free the industry from complicated and counter-productive controls. The end-result therefore is a series of sub-optimal suggestions, accompanied by the clear danger that even these halfway houses may not be found acceptable by a government that is critically dependent on support from a recalcitrant Left.

That having been said, the suggestion that the country move to a situation in which prices are fixed on an export-parity basis, instead of the current import-parity one that exists today, commends itself since all that import-parity does is to ensure that oil firms get another layer of protection on account of the existence of import duties, even though no imports are taking place and therefore no protection is required. Mr Rangarajan has suggested transiting to a new system in stages, and beginning with the use of an export-parity price for 20 per cent of petro-products. This limit would be raised every year, depending upon the level of exports that actually take place. In a sector crying out for reform, this gradualist approach may be simply too conservative a recommendation. After all, the oil marketing companies buy about a third of their crude oil from ONGC, which charges no import duty and in fact sells at a $5-6 discount; but when prices for the oil marketing companies' refined products are fixed, it is assumed that this crude has been bought at international prices and that import duty and freight cost have been paid on it! This is why the finance ministry has asked the petroleum ministry to examine whether oil firms are actually incurring the costs that they have claimed while demanding compensation.

The obvious remedy for the growing cooking gas subsidy is to eliminate it — especially since this is a fuel used primarily by the middle class, which merits no subsidy. As for kerosene, in the absence of subsidy elimination (which is impossible on account of political considerations), the best bet would be to reduce the burden in stages. The Rangarajan Committee has suggested two sets of prices. However, this could be an administrative nightmare if the government is serious about eliminating subsidies in stages.

While the suggestion that the oil royalty/cess be hiked to mop up Rs 13,000 crore extra is a good idea in a situation in which ONGC, primarily, is simply raking it in, this could become problematic since the government is unlikely to roll back such specific levies when prices fall. Also, given how governments tend to pick and choose from committee recommendations (which government is going to allow kerosene prices to go up, as has been suggested?), it is not inconceivable that the oil cess will be raised even as the oil firms continue to bear a consumer subsidy. Replacing the current ad valorem duties with specific ones is similarly OK, but since taxes do require buoyancy, a better idea is to have an ad valorem tax which, at a certain trigger level, automatically gets converted into a specific duty, and reverts back to ad valorem if oil prices drop back