20/10/2014

Decontrol further | The Indian Express

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Express News Service | Posted: October 20, 2014 12:13 am

Narendra Modis government has taken its first major

reform decision by announcing the decontrol of diesel prices,
which will henceforth be market-determined. Admittedly,
this wasnt a politically difficult call, given the softening
trend in international oil prices. In the last three months, the
average cost of crude imported by Indian refiners has
dropped from over $ 105 to under $ 83 a barrel. This has led
to retail prices of petrol which are already decontrolled
falling by roughly Rs 7/ litre since July. Consumers will
similarly benefit now from diesel decontrol, with stateowned oil marketing companies (OMCs) reducing prices by
Rs 3.5 a litre from Sunday. But decontrol is a double-edged
sword, as consumers need to also be prepared for the
consequences of any renewed spike in global crude prices or
a weakening of the rupee.

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20/10/2014

Decontrol further | The Indian Express

The Modi government must be credited, therefore, with

going for decontrol rather than playing safe by persisting

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with administered pricing.

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But merely giving OMCs the freedom to fix retail prices based
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on import parity costs isnt enough. Genuine
decontrol
to your Inbox.

requires imports of petrol and diesel being opened up to all

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players, including standalone fuel retailers who may not

address
mind incurring under-recoveries (whichEnter
are your
onlyemail
notional

and do not always imply losses).

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The current rule that gives only OMCs or those

exploration operations in India the right to market

transportation fuels needs to go, so that consumers benefit
from (or pay for) real decontrol with competition. Also,
having eliminated under-recoveries in diesel that amounted
to Rs 62,837 crore in 2013-14, the government needs to target
the Rs 77,000 crore-odd subsidy on cooking fuels next. It
should do this by making all consumers pay the market price
for LPG and kerosene, and transferring the difference with
any subsidised rate directly into the bank accounts of
beneficiaries. The latter must be carefully identified, to
include only low-income or vulnerable households deserving
of subsidy.
Where the government has really played it safe is in its new
domestic gas pricing policy. By removing any link with
imported liquefied natural gas (LNG) prices that was part of
the earlier Rangarajan Committee formula, domestic gas
producers have been granted a modest price increase from $
4.2 to $ 5.6/ mmBtu. A country that meets a third of its gas
requirement from LNG imports at $ 13-14/ mmBtu needs to
incentivise domestic exploration and production activity.
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