Oil prices have jumped 25% from $100 per barrel in January and the three-digit levels are here to stay for a while. Is India, which imports around 70% of its oil requirements, doing anything on the demand side?
Illustration: Jayachandran / Mint
No, and its latest move reflects its continuing trend of cosmetic effort. It is “asking” oil marketing companies to raise prices of premium petrol and diesel and introduce non-subsidized premium cooking gas for those who can pay. Will that help? Hardly. Here’s why:
While transportation fuels account for around half the petroleum products consumed in the country, premium fuels that offer better vehicle performance make up 20-30% of the fuel portfolio of oil retailers. The premium segment share in the dominant fuel diesel is under 20% and petrol, around 30%. These shares are growing.
But diesel is the common man’s fuel — public transport uses it; and mass consumption goods are carted on trucks that run on it. This places electoral pressure on political parties not to raise prices. So, the idea now is to raise premium diesel — and petrol — prices on the back of their value proposition.
In the case of diesel, the premium grade is 3-4% costlier, but bulk consumers such as truckers are buying it as it nets back a saving of around 5%. For the right reason — better mileage due to better combustion of fuel; and the wrong reason — lesser likelihood of adulteration as the premium grades are not available at all outlets. Likewise in the case of petrol.
So there’s little headroom for oil retailers to raise the relative prices of premium fuels.
In the case of LPG, the move to introduce differential pricing in an attempt to secure targeted subsidy and get the bulk of the consumers to pay market prices is a welcome one. But mass delivery under the public sector fold is prone to leakages. For instance, as a study by NCAER had shown, 36% of subsidized kerosene ends up in the black market. Besides, it had recommended sale of subsidized kerosene only to those below the poverty line, thus reducing the bill by 58%. But the government is yet to muster the courage to do so. So, how will it ensure that consumers who can afford it pay a higher differential price for LPG? Both user segments represent large vote banks.
The prevailing high level of inflation offers the government a perverse rationale to control prices of these fuels. While a slowing economy may contain industrial demand, without true price signals, retail demand won’t rationalize. Retail prices need to be raised across the board. There is no choice as rising oil prices are here to stay.
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