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Retreating oil prices: opportunity to put back reforms on course

D M DESHPANDE

At last oil prices have fallen in the world markets; what a sigh of relief this is for both the Government and the citizens in India! With Brent crude slipping to a little over $60 a barrel, oil has seen a correction of 30% since the time it had touched $86 a barrel just last month beginning. Almost simultaneously, rupee value in the foreign exchange market has stabilized after a bout of appreciation. In fact, going by present indications, rupee may gain value going further. These two macro-economic developments mean that India will be able to keep its current account deficit below the targeted 3% level. If the Government follows a modicum of fiscal restraint in the months leading to general elections early next year, even the fiscal deficit may not go out of control.

All this will certainly have a benign impact on the level of inflation in the economy. One can be more sanguine about the growth prospects in the near term and with a little bit of luck, even in the foreseeable future. There were experts who had predicted that the oil prices will hit or even cross the $100 per barrel mark. They are nowhere to be seen now; in fact, bearish trend forecasters have now taken the central stage. Just as the rise in oil prices was sudden, the fall too has been quick and sharp, living up to the expectation that it remains by far the most volatile commodity in the world markets.

Analysts do have an explanation each-both for why the oil prices flared up suddenly and how they have cooled off now. Sanctions by US on Iran and tightening of the supply position led to the prices going up. Now, easing of those sanctions, build up of oil inventories in the US and the oft repeated possible Chinese economy diving in to recession are cited as reasons for climb off. Actually hedge funds betting on oil has led to spike in prices; the earlier ‘oil shocks’ are a testimony to this kind of behaviour by funds. So, there is no point in giving up the vigil on oil prices and push reforms so that the shock absorbing capacity of the economy improves.

The fall gives an excellent opportunity to the Government to put back the reforms on sound pedestal. On October 5 the Government cut the excise duty on petrol and diesel by Rs 1.50 per litre; it directed the PSU oil marketing companies to reduce prices of both by Rs 1 per litre and absorb the same. In addition, states were asked to reduce VAT by similar amount. Several BJP ruled states obliged and the fuel prices were cut by a total of Rs.5 per litre. While governments are well within their rights to adjust their duties, decision directing oil marketing companies to absorb Rs 1 per litre was not only arbitrary but reneging on the reforms process.

Auto fuels should never be subsidised, especially, in the context of our nation, where the import dependency on oil is in excess of 80%. After years of debating and at least three top level committees’ recommendations, it was decided de-control oil prices. The Government yielded to the pressure in October when the oil prices touched $86 per barrel.

Now is the time to set the record straight and bring back parity of pump prices with import costs. Some have argued that since the prices have fallen steeply, the oil marketing companies profitability has any way gone up and hence they can bear the additional Re.1 cost. This is flawed on more than one count. First, oil PSU’s are accountable to shareholders and they have to operate as commercial entities. Second, all attempts to subsidize will only distort the markets. Finally, it’s a matter of principle and reform. The question is not of Rs 1 per litre of fuel; it is one of reverting back to the price determining autonomy of oil PSU’s. Eventually when the prices go up, which they will do, sooner or later, the Government of the day will only be happy to ask them to shoulder Rs 1, Rs 2, Rs 3.. per litre cost. This will only take us back to administered price regime of the past with all its attendant problems.

Taking advantage of the present uncertainty, oil PSU’s too have not passed on the full benefit of the fall in prices to the consumers. Perhaps, they are building a buffer which could come in handy should the Government insist on them to lower the prices significantly as the nation goes to poll early in the next calendar year. Again, these are arbitrary decisions which will only result in lack of transparency in pricing by far the most widely used fuel in the country.

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