Fuel price revisions: Burying the administered price mechanism ghost
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Last Friday, India formally dismantled the last vestige of the administered price mechanism or APM for petrol and diesel. From 6 am, government-owned oil marketing companies, who between them account for 90% of the retail market for fuel, linked daily sales at all their petrol pumps with the international prices of crude oil. Consequently, like in the US and Australia, domestic diesel and petrol prices have now been globalized.
This marks the culmination of a very significant piece of economic reform; something we would be remiss in playing down in comparison to other reform initiatives.
Not only is it politically sensitive to undertake but it nudges India a step closer to becoming a competitive market economy defined by rules as opposed to the existing exception-based regime.
And coincidentally, it comes on the eve of the 20th anniversary of the decision by the then United Front government led by Prime Minister I.K. Gujral to set in motion the dismantling of APM—in fact, it was the last decision of the government as it lost power soon after. Prior to that, petroleum prices were administered (read subsidized); not only did it lead to inefficient allocation of a scarce resource, it also became a fiscal landmine (as the subsidies were buried in what was known as the oil pool account, details of which were all but opaque).
Importantly, this initiative represents a rare political consensus on economic reforms and spans several regimes. The idea was first proposed during the Congress government led by Prime Minister Narasimha Rao. The then petroleum minister Satish Sharma set up the ‘R-committee’ under the chairmanship of petroleum secretary Vijay Kelkar (R stood for reforms) to plot the blueprint for dismantling APM.
As things happen, the R-committee survived the government and eventually came up with an action plan. Remember this was the time when there was enormous political uncertainty with minority governments barely surviving; yet somehow, the political support for the idea did not wane.
Eventually in November 1997, the I.K. Gujral government bit the bullet as it were. I remember meeting up with Jairam Ramesh, serving as an officer on special duty in the ministry of finance, whose then boss, finance minister P. Chidambaram, was one of the key backers of the reform, late night after the cabinet meeting to glean finer details. Actually, Gujral was uncomfortable giving the go-ahead and it was Mulayam Singh Yadav, the then defence minister, who tipped the scales.
As per the time table, full deregulation was to happen in 2002. However, with crude oil prices beginning to see increasing volatility, political support rapidly evaporated and the deadline was never realised.
It was only after the Congress-led United Progressive Alliance took charge in 2004 the idea was revived. Again, to manage the political mine fields, the government chose the committee route—first under former Reserve Bank of India governor C. Rangarajan, then under Planning Commission members B.K. Chaturvedi and Kirit Parikh. Armed with expert advice, the government backed the idea of freeing the prices of petrol and diesel.
Consequently, in June 2010, the government deregulated petrol prices; diesel was decontrolled by the Prime Minister Narendra Modi-led National Democratic Alliance in October 2014—retierating the continuity of thought on this crucial piece of reform.
The real test will, however, arise as and when international oil prices start hardening. At present, crude oil prices are hovering around the $50 mark; the domestic retail story would alter radically if, for instance, prices spiked to $100 per barrel of crude.
It will have to be seen whether the Indian consumer possesses the resilience to adapt and the incumbent government has the political spine to stay the course.
But given the global circumstances—especially the slump of China—and the game changer role of solar power, such an eventuality may not actually arise.
Anil Padmanabhan is executive editor of Mint and writes every week on the intersection of politics and economics.
His Twitter handle is @capitalcalculus.
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