‘Managed’ deregulation

Govt decision to lower fuel prices rightly roils markets

The government decided last week to lower fuel prices at the pump in India, following a prolonged period of political pressure caused by the pass-through to consumers of high global prices for crude oil. Finance Minister Arun Jaitley said that the excise duty on fuel would be cut by ~1.50 a litre. This follows a series of hikes in duty on fuel over the period post-2014, when global crude oil prices were low. In addition, state-controlled oil-marketing companies were asked to reduce their prices by ~1, meaning that the benefit to consumers nationwide was ~2.50 a litre. Finally, 12 states ruled by the Bharatiya Janata Party also reduced state-level fuel taxes, meaning that in many places the benefit to consumers was ~5 or more. The finance minister has insisted that there will be no fiscal slippage as a consequence of this move and that the fiscal deficit target of 3.3 per cent of gross domestic product, set in the Union Budget for 2018-19, will be met.

However, there are concerns on this move. The sharp downward movement in the share prices of the state-controlled oil-marketing companies — about 20 per cent — reflects widespread fears that they will once again be expected to absorb “under-recoveries” on the petrol that they sell. Private marketers of fuel, meanwhile, are expected by the markets to prosper. The same questions that were asked of government action in previous eras in which “under-recoveries” were common must now be asked again. In particular, once a public sector company is listed on the stock exchanges, can the government, as majority shareholder, essentially ride roughshod over minority shareholders’ interests in this manner in order to meet its political or electoral priorities?

It is perhaps too soon to see this as a reversal of the policy of steady deregulation that has been followed by successive governments for the past eight years. It is clearly a response to a specific situation in which crude oil prices have sharply risen. However, it does to an extent set back some of the gains made in the past of de-politicising the price of petrol and diesel. In the recent past, before the crucial assembly elections such as in Karnataka, the price of fuel was implicitly frozen — but on this occasion, the government has been open about its intentions. It is worth noting that the arguments in favour of a de-politicised, de-regulated price for fuel have not lost any of their weight. Allowing administrative or political concerns into the prices faced by consumers opens the door for sustained pressure on the fisc through subsidies. In addition, it harms the oil-marketing companies as well as the attempts to combat the growing import bill and thus the current account deficit. All attempts to insulate Indian consumers from high international crude oil prices will fail in the long term, given the fiscal mathematics faced by the Union government. It is to be hoped therefore that this indeed is a one-time action and that is not repeated.