As was expected, the Union cabinet has acted timidly in deregulating key fuels. On Thursday, the Cabinet Committee on Political Affairs (CCPA) allowed oil marketing companies (OMCs) to make “small corrections” in diesel prices. In the same breath, however, it increased the number of subsidized LPG cylinders from six to nine. It left the prices of LPG and kerosene untouched.
The decision, as with all decisions on pricing, has been political. So it was too much to expect diesel prices to be, finally, market-determined.
The government communiqué carefully avoided the expression deregulated. While OMCs have been permitted to increase diesel prices and effect “small corrections, in practice these companies will always defer to the government’s wishes on the matter. The key reform to be effected was linking diesel, LPG and kerosene prices to the prevailing international crude oil price. This has not happened.
The result is the continuation of an old formula: raise prices by a hefty amount once the crude and retail price gap becomes too large. This was what happened last year when diesel was made expensive by Rs.5 a litre. There are two problems in this.
One, any such increase just covers up the inefficiency of the oil companies. Two, the rationale of politically estimating what is the right quantum of increase is always dubious.
There simply is no way a group of ministers can aggregate the vast amount of data needed to arrive at the right price. Such a “calculation” is never based on economic concerns (such as galloping demand due to cheap oil) but reflects a political “comfort level” that CCPA members think will not inflict electoral damage. To paraphrase the economist Enrico Barone, the CCPA is acting like a de facto ministry of production in the collectivist state.
It is too hard to expect any government to completely free the prices of “sensitive” fuels such as diesel, LPG and kerosene. What can, and should, be tried is to market price these fuels and then hand out lump sum subsidies to those who merit them. This way, there will be fewer price distortions.
This sounds like a textbook prescription. But with the coming of Aadhaar and National Population Register numbers, this is no longer in the realm of fantasy.