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Economy

To Really Free Fuel Prices, Ban Future Govt Intervention

Recently the government has been thinking of “freeing” fuel prices. The idea is to stop the subsidy to diesel and LPG, where currently, the losses because of the “underpricing” of these products are covered by government subsidies. These losses are huge – from 0.5% to 1% of GDP – which hugely increase the fiscal deficit.

Petrol is free of such a subsidy and costs between Rs. 55 and 78 per liter, while diesel costs less than Rs. 50 per liter. LPG cylinders, when subsidized are around Rs. 430 per 16 kg cylinder, while the non-subsidized version is available for Rs. 920. For LPG the government has reduced the number of subsidized cylinders to 6 per year, and subsequent purchases will require one to pay the higher rate.

Moving to a no-subsidy regime is a good thing, of course. I have argued for long that we, as taxpayers, subsidize a lot of corruption and inefficiency and stifle competition through the fuel subsidy. Oil marketing

The government is now considering making fuel prices free – so that the public oil companies don’t have to be compensated. But I argue that just freeing fuel prices is not enough, because it will not solve the three problems highlighted in bold above.

Petrol prices are free, but are they really the prices that work for us on the downside? I found recently that the oil companies fool us by giving us a complex breakup of the components of the petrol price which still doesn’t give us market linked prices; instead, they just seem to be eating up the profits. This will happen with diesel and LPG as well, if the public companies are the only ones peddling fuel.

The only way to solve this is competition; but we tried that earlier, didn’t we? Reliance and Essar started to set up large retail pump networks, only to find that eventually the government started to give subsidies on fuel to public sector companies, and their entire investment was destroyed. If the government freed fuel prices now, will the private sector want to invest (and lose) again?

The answer is: to help the private sector compete, we must introduce a law that bans the government from providing fuel subsidies any time in the future to public sector oil companies. If any subsidies are provided, they should be provided to everyone, including private sector players. This will be unacceptable because our country thinks that giving money to private players is a sin – I think it’s only reasonable to do this.

(If we refuse to give subsidies to the private sector, and we ever go back to the subsidy regime, all private sector players must be compensated in full for all investment made plus interest plus 10% return on capital.)

Without such a law, we will only get the public companies looting us by becoming a cartel and keeping prices high even when market prices fall. Then some Hazare type of person will come and demand that prices be subsidized again, which is how we go back to license raj, a process we should oppose fervently.

The other thing we should consider is remove government ownership of most public sector oil marketing companies. Why should the government own any stake in an oil marketer or refiner? This is not politically acceptable, but it should be our goal in the next “five year plan” – to abolish government ownership of what should be privately owned companies (even banks) and to encourage private industry.

As we free fuel prices, we need to really create an environment where free prices co-exist with competition and arms length transactions.