Fuel of Burden

With the latest hike in oil prices, petrol has today become a fuel of burden and not something that is expected to drive and boost the economy. The government’s decision to raise petrol price by Rs 4 a litre and diesel by Rs 2 per litre will therefore come as a huge burden for the common man and the consequences of the latest fuel hike is bound to lead to inflationary tendency on a range of public commodity and services. For motorists and commuters alike the fuel hike will be a telling blow. More so, the fares of taxis, buses and auto rickshaws in the State will in all probability go up. While the hike is quite understandable given the rise of international crude prices and the huge losses being incurred by the Oil Marketing Companies (OMC), Rs 4 is too steep a hike and the consequent economic burden on the common man is going to be too much to bear.

Accepted that the necessary hike has been now done, what is disturbing to note is that even the public sector oil companies are of the opinion that this latest hike is not enough to offset the under-recoveries. According to market calculations, the hike in petrol and diesel prices would give OMCs only Rs 9,200 crore as compared to the projected Rs 73,500 crore revenue loss projected for 2006-07 due to the unyielding rise of global crude oil prices. In other words, the current price hike will help to reduce the under recoveries but it will not offset the entire loss. What this therefore implies is that further hike in prices of petrol and diesel seems inevitable in the days and months to come. This is therefore something that is a matter of serious concern for the Indian economy.

While the government may have worked on a formula to ease the subsidy burden—on LPG and Kerosene— that is being borne by oil companies, it goes without saying that the current system has too many flaws. Kerosene prices for instance have remained unchanged since March 2002 and LPG since November 2004. The current hike likewise has spared the two fuels. The Government by continuing with the system of cross-subsidies on petroleum products is only perpetuating the prices of the so-called poor man’s fuel, kerosene, and LPG at such artificially lower rates. While the welfare objective of the government is appreciated, a reasonable correction of prices on subsidized fuels should be undertaken sooner than later in order that prices of petrol and diesel are not overstretched to unfair limits as is being happening for sometime now.  

There are no two opinions that political compulsions appear to be edging out good economic rationale leading in turn to an absolutely unfair arrangement where consumers of transportation fuels are being forced to pay more in order to augment the losses faced by the government as a result of its own populist gimmick. The Government should also realize that the subsidy being doled out in large quantity is being misused and is not reaching the targeted population. Cross subsidization has to be eased out slowly but surely. There is also the growing opinion that if at all subsidies is to continue it should be funded from the Union Budget rather than make the oil companies pay similar to the way in which state governments pay State Electricity Boards for free power to farmers.