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Why Petrol Prices can't be freed permanently?

Posted in Finance Articles, Total Reads: 3706 , Published on May 15, 2011

After the euphoria surrounding the election results in 5 states subsided in mid May, the country was subjected to another round of hardship by the government in the form of petrol price hike. The hike effective midnight of 14th May has been the steepest since the petrol price was deregulated. The petrol prices at pumps across the country was hiked by 5 Rs and it is bound to have an immediate effect on the budgets of individual households across the country.

Petrol Prices-Can they be freed ?

But even after this hike, the officials at the various OMCs(Oil Marketing Companies) are of the opinion that the hike is inadequate and another  hike is in the offing. This brings us to a question on whether the fuel prices can ever be freed permanently in a country like India. The answer is No unless there is drastic rethinking in the way the fuel prices are decided. In one of our earlier article on Petrol Pricing, we had bought out how the fuel prices are arrived at and the quantum of which goes to the government in the form of taxes. So unless that is reduced the fuel prices can't be freed permanently as people would always feel that we are actually paying more in taxes than for the actual product.

Now let's list down the various reasons why we can't free the fuel prices permanently.

1. Indians always have this habit of postponing issues which don't have a permanent solution to an extent that it becomes a monster. Similarly in the case of petroleum products the government perceives kerosene and LPG to be poor mans product and considering vote bank politics dither from making any changes to their price. So instead of making small cost push ups incrementally allow the difference to reach enormous levels resulting in doing catch ups which is literally impossible.

2. The next idea to resolve this issue of  losses suffered is through asking upstream companies to share the loss burden. Instead of reforming the ways the petroleum products are taxed, they cause problems to another entity related to petroleum sector. When the going gets tougher for upstream companies and they complain about the losses, the government comes up with another brilliant idea of capping the amount of losses to be borne by these upstream companies. So currently around 33% of losses are shared by OMCs and another 33% by upstream companies.

So that brings us to a question on what happens to the other 33% and that's where the government comes up with another unique idea. They decide to issue oil bonds to these companies. However these are just short terms issues but the issue in the petroleum sector is a long term one which no one is willing to address.

So by addressing the issues without any foresightedness we have reached a stage wherein we need a "Manmohan Singh" to the petroleum sector similar to the one we saw in 1991. Pushed to the corner the country had to do something drastic which was done at that time and now is a chance for him to redeem himself and do the same in petroleum sector.

Every 10 $ increase in international fuel price shaves off 0.35% of GDP growth. Allowing an artificially low prices will have implications of managing the balance of payments, will cause food prices and other essential commodities to spiral when there are steep hikes at one go instead of small cost ups. Currently the entire system is messed up due to government intervention and the need of the hour is major overhaul and allowing the OMCs to function independently and taxing only the profits of these companies rather than taxing the product of these companies. Hope the sense prevails and actions are taken now before it reaches a stage where we cannot even think of reforms.

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