Govt steps back on oil decontrol

 UPA government faces its first trial by fire on key economic measures as allies occupy the space vacated by the Left

THE government seems set to postpone the problem of freeing up fuel prices, stymied in its attempt to sugar-coat the bitter pill of reform by the sharp run-up in crude oil rates.
    Allowing fuel to be sold at market rates forthwith will result in consumers having to pay higher prices, threatening the new government's popularity and inviting the wrath of at least one key ally.
    The price deregulation exercise "has lost its significance," a senior government official said, because crude oil prices for domestic consumption have crossed the tolerance threshold of $65 per barrel set by the political leadership.
    The government's resolve to bring about pricing reform was further weakened on Monday by railway minister and leader of key ally Trinamool Congress Mamata Banerjee. With her eye on a series of local elections coming up in West Bengal, she told a Bengali television channel that her party would protest against any move which would result in higher fuel prices (See page 3).
    Likewise, assembly elections due in Maharashtra later this year have a weakening effect.
    Oil minister Murli Deora, who had announced on the day he took charge that that his ministry would send a proposal to the Cabinet to deregulate auto fuel prices, seems to have developed cold feet too.
    Deregulation now, when crude oil prices have already crossed $67 a barrel, would result in petrol prices immediately going up by Rs 3 per litre, said a minister in the UPA government. Finmin to vet oil draft proposal
"THE newly-elected members of Parliament do not want to greet people for the first time with a price hike," he said.
    Oil ministry officials say deregulation is on the agenda, but its implementation will have to wait. "The draft proposal will first be discussed with the finance ministry and then, it would be sent to the Cabinet. The process will take time," an official in the ministry said.
    Deregulation is necessary to limit the unsustainable growth in the fuel subsidy bill, but it should "not be misunderstood with promoting oil companies' interests at the cost of common man," he added.
    Planning Commission deputy chairman Montek Singh Ahluwalia also observed on Monday that deregulation is on the government's agenda and that subsidy, including oil subsidy, should be better targetted.
    The surge in global crude oil prices has meant that the government's direct oil subsidy bill, paid through oil bonds, doubled to Rs 71,272 crore in 2008-09 from a year ago. Oil prices have been through a sharp cycle over the past year. From a peak of $147 per barrel in July 2008, the price dropped to $32.40 in December 2008. Besides direct subsidy in the form of oil bonds, state-owned oil companies also subsidise fuel bills. The total revenue loss of the three stateowned oil companies — IOC, BPCL and HPCL — was over Rs 103,000 crore in 2008-09 compared to Rs 77,123 crore in 2007-08.
    Under the present subsidysharing mechanism, the so called under-recoveries of oil marketing companies are equitably shared by the three state-run fuel retailers, the government and upstream companies ONGC, GAIL India and Oil India. The government had deregulated prices of petroleum products in 2002, when it did away with the administered price mechanism. But it retained four "sensitive" fuels — petrol, diesel, LPG and kerosene — under price control, arguing that that their prices impact the "common man".
    rajeev.jayaswal@timesgroup.com 

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