The government has made a bold policy move on petroleum subsidy phase-out by allowing oil marketing companies (OMCs) to increase diesel price in a staggered manner. It has also fully deregulated pricing for bulk sales of diesel to consumers like defence forces, Indian Railways and road transport corporations, which account for 22-23% of total sale of the product. These moves will help the Centre to fix its skewed fiscal arithmetic which is crucial to attracting foreign investment and hence should be welcomed.
However, taking a decision is the easier part of the job. The government will have to stick to the decision and resist the temptation of interfering with diesel pricing post-deregulation. It is not an unfounded fear. It has happened in the past in the case of petrol, the pricing of which is deregulated on paper from May 2010.
During the assembly polls in five states in early 2012, the OMCs did not hike prices despite a surge in international crude oil prices. In the process, they incurred significant under-recoveries. Since petrol was deregulated, they could not claim any compensation from the government.
After this bitter experience, the OMCs started seeking a return to the regulated pricing regime for petrol, raising questions about the feasibility of price deregulation. Similarly, the government has increased the number of subsidised LPG cylinders from 6 to 9 in a partial rollback of its earlier decision. The government may well end up repeating history in the case of diesel.
The deregulation of diesel pricing for bulk sales may not yield much for the government in the real sense as it would only lead to a reallocation of resources between government entities?from defence forces, Indian Railways and state transport corporations to the OMCs. If the operating costs go up, these entities would have to mobilise more resources, which can come from grants only. Though the Railways can also hike passenger fares and freight charges for additional resources, it would be politically not easy for it.
So the government has to go the whole hog on deregulation of the retail diesel price. Though politically difficult, this is the only credible option for the government to shed the petroleum subsidy burden.
The subsidy regime is a major obstacle to attracting private investment in petroleum product retailing as it favours the OMCs over private players. A subsidy phase-out will level the playing field and help attract investment from private companies.
