Free Press Journal

Petrol & diesel price hike: The coming oil challenge


At one level, consumers of petrol, diesel and other petroleum products might find it hard to swallow that when the global prices of crude oil were down sharply, there was no commensurate reduction in the retail prices. And now that the global prices of crude are yet again creeping up slowly but surely, the oil marketing companies are quick to pass the burden to the consumers. Pump prices of petrol moved up to Rs 76.24 a litre in Delhi, Rs 78.91 in Kolkata, Rs 84.07 in Mumbai and Rs 79.13 in Chennai.

Likewise, diesel now retails at Rs 67.57 a litre in Delhi, Rs 71.94 in Mumbai, Rs 70.12 in Kolkata and Rs 71.32 in Chennai. The prices of petrol and diesel were raised on Sunday by 33 paise and 26 paise respectively in Delhi. There was a corresponding increase in other parts of the country. Notably, the upward price revision was kept in abeyance till the end of the Karnataka polls. Once the poll ended, the oil market companies reverted to the market price mechanism sanctioned by the Modi Government early on in its term. Previously, the administered price mechanism was followed by all governments. Which meant that oil market companies per force had to absorb huge losses when the global crude prices ruled high. However, the Modi Government did not proportionately reduce the pump prices of petrol and diesel even when these witnessed a sharp dip in the global market.

In other words, it pocketed the gains of low crude prices while transferring the pain of high crude prices to the consumers. Modi was fortunate that oil prices in the international market started slipping around the time he took over as prime minister. Having ruled high through the later part of the UPA decade, at one time, crude sold for $130 a dollar in the global market. And only last year, during Modi’s third year as prime minister, it was $32-35 a barrel. However, after resuming the upward movement a few months ago, now the global price of crude ruled upwards of $80 a barrel.

For three years, thanks to low international prices the government is reported to have gained over Rs two lakh crores annually. Besides, the Government saved a considerable sum annually by weeding out the undeserving from the vast pool of subsidised cooking gas users. This money was put to good use on infrastructure, subsidising highly cheap cooking gas cylinders to lakhs of rural households, on building tens of lakhs of toilets, etc. The point being that the savings from relatively cheap global crude prices were used for augmenting the public goods. So, at another level, the retention of gains stemming from cheap oil prices globally were put to good use and, therefore, the consumers should not begrudge these gains. But still, the Modi Government faltered in its resolve to abolish the old administered price mechanism, the bane of oil companies before its advent, when it put on hold the hike following the rise in crude prices globally a few months ago. The oil marketing companies were restrained from passing on the small hike in the price of LPG to the consumers.

Yet, the Government will have to make tough choices since simultaneously, with the spurt in international crude prices, the rupee too has begun to weaken against the dollar. This can play havoc with the trade account, especially when exports continue to be sluggish. Even though the forex reserves are $400-plus billion, the pressure on the fisc is bound to be considerable. With the price-line too beginning to creep up, the Government has a task on its hands keeping the economic situation healthy in an election year. As the election draws near and if the global crude prices increase further, there will be pressure for the reduction of levies on petroleum products in order for it to absorb such increases.

It will be a test of the Government’s will to enforce cost-plus rates for petrol, diesel and non-subsidised LPG, barring, of course, kerosene which is highly subsidised for the weaker sections. It will also have to grapple with a huge pressure on the general price line if the fiscal deficit on account of costlier crude imports rises much beyond the budgeted figure. The government needs all hands on the deck to deal with the coming economic challenge. With the West Asian situation getting uncertain, thanks also to the idiosyncrasies of President Trump, disruption in supplies and consequent pressures on crude prices cannot be ruled out. Hopefully, the government will be ready with Plan-B in case of an inordinately big rise in the global crude prices.

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