Finance Minister Arun Jaitley announced the cuts in the prices of petrol and diesel on Thursday. The government has asked the oil marketing companies (OMCs) to cut the retail price of both diesel and petrol by Rs. 1 per litre, whereas government will reduce the excise duty by Rs 1.5 and the state governments are asked to take another cut of Rs 2.5 in their value added tax.
Maharashtra and Gujarat became the first states to follow the cue, and as BJP along with its allies is in power in nearly 21 states, more states are expected to soon come aboard. This may reduce prices of these fuels by Rs 5. Though in consumer interest, the move brings out the question: Is this the end of reforms in the pricing of petroleum products, which took nearly eight years to take shape?
In the last six months, government has 'pushed' the oil marketing companies or OMCs to 'alter' the pricing mechanism. The prices of both petrol and diesel are decontrolled in the country and the OMCs are free to fix prices in accordance to the international prices of respective products. Therefore, this political intervention in the pricing was least required.
The excise duty cut will reduce the tax revenues by Rs 10,500 Crore. These taxes on petrol and diesel are biggest source of income for the government. For every litre of petrol sold in Delhi, Rs 37.28 are shared by the state and the central government. Rs 3.66 goes to the petrol pump owner and Rs 42.79 is the price of petrol at refinery gate. This price is achieved by factoring the price of petrol for fifteen days at the trading hub in Singapore and the average price of rupee versus dollar.
Asking the OMCs to cut their price is altering with this formula. This method is followed across country by all players. The private players, Reliance Industries, Essar Oil (now owned by Roseneft) and Shell India also have license to sell these products in India. They blame OMCs for the cartelisation and the government for supporting them. The prices of products are high because of the heavy taxes, and the political call taken to fund the infrastructure projects with the extra money. But risking the reforms undertaken, to clean up pricing is uncalled for.
The concept of freeing up the prices came up during the then PM Atal Bihar Vajpayee-led NDA government, but later in 2003/04, they also fell prey to the rising crude oil prices and abandoned the reforms and UPA didn't move much. The biggest test of PM Modi-led NDA government is now, with the rising crude oil process and depreciating currency. The crude oil is at six year high of $86 a barrel and rupee is at its record low against dollar. Can they stick to the pricing reforms? Till today the record was impressive but now the threat looms large.
This is second time that the political leadership has fiddled with the pricing mechanism. Earlier, in April end the OMCs halted their daily price corrections, when the campaign for the fiercely fought Karnataka polls was on. The stock price of the biggest OMC in the country, tanked from Rs 154.3 to Rs 129.5 in last 15 minutes of trading. Similarly, BPCL and HPCL dipped from Rs 365.20 to 306.5 and Rs 246.75 to Rs 194.8, respectively.
Before addressing the journalists today, FM Jaitley met the oil minister Dharamendra Pradhan, and agreed to ask the OMCs to cut the price. This reduces the credibility of the government. During most part of the NDA regime, the international prices of crude oil have remained benign and the currency has remained stable.
This not only allowed the government to clean up the books of OMCs, completely decontrol pricing of petrol and diesel, along with LPG and streamline price methods of kerosene oil. For last one year, the petrol and diesel prices were corrected daily. Although the prices of petrol were decontrolled in 2009, it was still not practiced till 2014. The investors trust is already broken, now NDA will have to work harder to regain it. Hope this will not take another eight years to build up.