State-run oil companies and the government face a piquant situation every few months. International crude oil prices gallop and inflation at home too remains high. There has been hardly any respite from this twin problem.
Nor is there likely to be any in the near future, unless the government whips up some magic. On Monday, the chairman of the Indian Oil Corporation (IOC), R.S. Butola, said his company would like to raise the price of petrol “at the earliest possible”.
The firm loses close to Rs 7 per litre of petrol. In addition, on a daily basis, IOC loses Rs 297 crore due to selling diesel, kerosene and LPG. The latter sum alone is more than Rs 1 trillion per year. A Bloomberg story on Monday said the company is borrowing as much as $1.3 billion every month to make up for losses from selling automobile and cooking fuels below market prices. Overseas borrowings were $4.6 billion at the end of last month.
This is reckless financial behaviour on the part of the government. And this is unlikely to end soon. With fuel price inflation in double digits (13.05% for the week that ended on 9 April, year-on-year), a significant correction in these prices to align them with market prices for crude oil will only fuel more inflation. With elections on now and in the next one year, there are no political incentives to take the right step. Giving money to oil marketing firms with a lag cannot eliminate losses: by the time money is reimbursed, they accumulate further losses. And even if the losses of these firms are made good, the subsidy burden only amounts to deficit spending by the government.
Clearly, the government and citizens alike are addicted to cheap oil when there is none to be had anymore. Since March, oil prices have hovered above $100 per barrel and last week they even breached the $124 per barrel mark, reminiscent of the highs seen in 2008. Sooner or later the government will have to make difficult choices. If anything, the need now is to communicate effectively to citizens that oil can’t be had cheaply anymore.
For how long can India sustain cheap oil? Tell us at email@example.com