Home / Opinion / Views /  An inconsistent retail fuel pricing policy is not good for India

If totally non-commercial considerations were to impose losses on a business, the political economy that allows this to happen would hardly qualify as market-friendly. And if the targets of such a squeeze were almost exclusively foreign companies, the country where this happens would automatically be identified as China or China-like. Yet, it is very much in liberalizing India that supposedly puts a premium on the ease of doing business that fuel retail has been rendered unsustainable by political expedience. The foreign victims in question are BP, the British energy major, and Russian Rosneft’s Indian arm, Nayara Energy.

India tried its hand at opening up the fuel marketing business to private industry in the early 2000s. Reliance and Essar took up licences in the business dominated by state-owned oil marketing companies, and signed up thousands of dealerships in different parts of the country. However, when global crude prices went up and Indian politicians shrank from passing on higher fuel costs to consumers, the government began subsidizing the retail sales of petrofuels, in a framework of administered pricing, but restricted the subsidy to state-owned companies. This meant that at Reliance and Essar pumps, the price of fuel was at a premium. This, obviously, was as sustainable as a snowflake in the Sahara. The private sector fuel marketing business virtually wound up in 2008.

Time moved on, the government adopted a strategy of raising petrol and diesel prices by Re 0.5 per litre every month. When the administered price of petrol reached what would be the market price, in June 2010, it was decontrolled, oil marketing companies being given the freedom to fix their own prices. The process was completed for diesel in October 2014. Thereafter, oil marketing companies were supposed to have marketing and pricing freedom, and the government offered no subsidy on petrol or diesel. Reliance formed a joint venture with BP to re-enter fuel marketing. Essar Oil resumed operations, got sold to a Rosneft-led consortium in 2017, and got rebranded as Nayara Energy.

Things went swimmingly, till oil prices began to zoom in 2021. In November 2021, state-owned oil marketing companies froze their retail prices, although the global crude benchmark, Brent, went up from $81 a barrel in November to $97 a barrel in February 2022, for reasons ranging from economic recovery, cartelized production restraint, and Russia’s invasion of Ukraine. Now, it is possible that the bosses of the state-owned oil marketing companies were gripped by a sudden bout of empathy for the common man and decided to absorb losses (under-recovery of cost from retail prices, in the jargon) while selling fuels. More probably, they were mindful of the inconvenience rising fuel prices would cause to the ruling party in five crucial assembly elections, including for Uttar Pradesh, slated for February-March 2022. Pricing freedom includes the freedom to set loss-making prices, obviously.

Once the election results were announced on March 10, retail prices of petrofuels were raised. They swiftly climbed, reaching 100 a litre for petrol in some states. This raised a stink and oil marketing companies froze prices again, on April 6.

State-owned companies account for 90% of the market and act as price-setters. Private fuel retailers are price takers. They stared at under-recoveries from any sale of petrol or diesel. Reliance-BP carried on, cutting supplies to dealerships and suffering losses of the order of 700 crore a month. When, under political pressure, the government announced duty cuts, the state-owned oil marketing companies passed them on to the consumers, instead of making good the losses they sustained during 137 days of a price freeze in late 2021 and 40 odd days since April 2022. Under-recoveries are reported to be 25-28 a litre of petrol and 10 a litre on diesel.

In the case of integrated oil companies that have refining, as well as marketing, super-profits at the refining end offer some solace, especially if they also export their produce. But stand-alone marketing companies have nothing to offset their losses. It so happens that the private sector oil marketing companies are owned wholly or in part by foreign firms. Foisting losses on Indian subsidiaries of foreign companies, so as to further the political fortunes of India’s ruling party, does not augur well for India’s reputation as a destination for foreign investment.

Oil marketing companies should be truly free to set their prices and compete in the market. If the government wants to shield consumers from rising fuel prices, it should offer the more deserving sections of consumers subsidies in the form of direct cash transfers, or even generalized cuts in levies, but not force retail outfits to absorb losses. A truly competitive market would realize efficiencies in the storage, transportation and retailing of fuel, which India currently forgoes.

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