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An opaque pricing system

The Government's decision to reduce the retail prices of petrol and diesel is welcome from the consumer's point of view and should help in moderating inflation expectations to some extent. Consumers would now be paying Rs.2 less for every litre of petrol and Re.1 less for diesel. It is only for the second time in a little over two years that the prices of these fuels have been reduced. However, since then there have been three markups. The last one, on June 5 this year, was rather sharp — Rs.4 for petrol and Rs.2 for diesel — triggering fierce controversies. Long after the administered price mechanism was formally dismantled in 2002, the prices continue to be determined by the Government in an opaque way. Whenever the prices were revised in a milieu of volatile prices, neither the quantum of increase (or decrease) in every specific case nor the timing of such revision carried satisfactory explanation. Besides, every time, the Government has to do some jugglery while distributing the financial burden (cast by global oil prices) among the consumers, oil companies, and the exchequer. This time even as consumers benefit, the oil companies say that their profit margins from the sale of petrol will come down while losses on account of diesel will go up.

With preparations for the next Union budget under way, it remains to be seen if the Finance Minister would implement fully the recommendations of the expert group headed by Dr. C. Rangarajan to change the largely ad valorem duty structure to specific ones. A total changeover would avoid the cascading effect of higher global oil prices. Very few State governments have followed Delhi in lowering the tax burden. For them, as for the Centre, the petroleum sector remains a major source of revenue and no substantial concessions can be expected. As for the public sector oil companies, there has always been a strong case to revisit the benchmarks set years ago for determining, say, the import parity prices of petroleum and diesel, none of which is imported. Global oil prices might have come down from the peaks reached three months ago but they are still volatile and widely expected to remain so. More than at any time in the past, there is a need to make the petroleum pricing mechanism transparent and the duty structure rational.

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