Is the increase in the prices of petroleum products justified? Here's what H L Zutshi, former chairman of HPCL, and Ram Naik, former petroleum minister, have to say about it.

H L Zutshi
Former chairman, HPCL

Any increase in price that affects the consumer evokes negative feelings. Doubts arise on whether the increase is justified. Price hikes for items of mass consumption also have a cascading effect on the economy, leading to inflationary pressures.

They become emotive and political issues if commodities such as petro-products are affected because something like LPG largely serves households, kerosene is used by the disadvantaged section of the society and diesel is consumed by the agricultural sector, road transport division and railways.

That the oil companies rake in huge profits and that the governments, whether central or the states, garner large duties and taxes being ad valorem in nature, is not missed. In the face of these facts, it is difficult to defend any price increase despite sound reasons.

The general view is that the governments must not just protect the oil companies' interests and its revenues alone, but also keep the interest of the common man in mind. Keeping that as the benchmark, it can be concluded that successive governments have been over-indulgent with pricing issues pertaining to petroleum products.

Based on the R Group and Expert Technical Group recommendations, the government, in September 1997, had announced the road map to dismantle the administered price mechanism (APM) by introducing reforms in a phased manner, starting from April 1998, with full decontrol effective in April 2002.

It had said that consumer prices of major petroleum products, namely, petrol, diesel, kerosene, LPG and jet fuel, will be moved to the market-determined prices principle in a phased manner.

The subsidy incurred on kerosene and LPG would also be moved to the central Budget from April 2002 onwards, instead of a pooled account as earlier.

In keeping with this timetable, the APM was dismantled, albeit with a rider that the subsidy on the public distribution scheme (PDS) for kerosene and domestic sale of LPG would be phased out in three to five years.

Interestingly, while refineries started recovering gate prices on import parity basis, the selling prices of marketing companies continued to be regulated by the government.

That is, except for products such as furnace oil, hexane, naphtha and lubricants, and later aviation turbine fuel, too, where the marketing companies decided prices on their own.

Consequently, the mismatch between the refinery gate prices and the selling prices reached intolerable levels as crude prices, which were around $ 28 per barrel in December 2003, increased to about $ 36 per barrel by May 2004.

Matters got worse as the plea by the marketing companies to the government to allow an increase in selling prices from this year onwards, fell on deaf ears.

This inflexibility can be expected in an election year. After all, increases in commodity prices do have political fallouts; but this time, the entire pricing regime fell into a messy conundrum.

Post elections, the government accepted the reality that international prices of crude had peaked to levels not heard of before. Since imports cover nearly 70 per cent of our requirements, and because we also have to pay international prices even for domestically procured supplies, thanks to the bonanza bestowed on our domestic exploration companies, there was hardly any choice left.

Of course, the government has been wise in buttressing the increase by absorbing a part of it by reducing the excise duties.

Some would argue that there is scope for the refiners and the marketing companies to optimise their costs and absorb a part of the increase. Others would say that the subsidy allowed on kerosene and LPG needs to be reduced by increasing their selling prices so that the burden on the exchequer or the marketing companies is minimised.

Interestingly, none of the private marketing companies has come forward to sell the subsidised products. They remain unaffected by the imbroglio as they claim full prices at their refinery gates.

Reducing the subsidy levels through the pricing mechanism will be a challenge for the government. The best course may be to undertake a fresh review of the current pricing mechanism to not only make it transparent, but also to examine the notion of import parity prices in setting domestic prices.

It must also be said that the responsibility of maintaining the price line must be shared with the state governments. The huge sales taxes they recover equally fuel consumer prices and increase the burden on the common man.

At present, the state sales taxes are opportunistic.

Ram Naik
Former petroleum minister, BJP

The recent increase in the prices of petroleum products is unjustified. Though crude and product prices in the international market had been going up during the National Democratic Alliance (NDA) regime as well, for more than two years, we did not hike the retail prices of LPG and kerosene since these are the common man's fuels.

The NDA was  aware that oil companies were earning good profits and they were in a position to insulate the domestic consumer from the adverse effects of price hike. In contrast with this, it is surprising that the present government has put on the common man the burden of an LPG cylinder costing Rs 20 more.

While forming the new government, various leaders of the United Progressive Alliance had said they would not like to see any increase in the prices of petroleum products. When some journalists had questioned the wife of Prime Minister Manmohan Singh, she had categorically stated that the new government should not increase cooking gas prices.

This was the voice of every housewife. I am surprised at the speed with which the government resorted to the price hike and forgot all pronouncements made by its leaders.

Even the Left parties don't seem pleased with the increase in petro-product prices. They are supporting the government, but they want the hike to be rolled back. The Bharatiya Janata Party will also confront the UPA government on the issue when Parliament opens for the Budget session.

As far as the price increase in petrol and diesel is concerned, Petroleum Minister Mani Shankar Aiyar had said that he would announce a new policy about petroleum prices. The policy has not been announced so far but the prices have been increased. Surely the price increase could have been timed with the new pricing policy?

Some states had faced drought conditions last year. The monsoons are said to be favourable this year. This is expected to increase diesel demand from the farm sector for increased agricultural operations.

The government should have taken this aspect into consideration and postponed the price-revision, particularly when international prices of crude oil have started coming down because of the decision of the Organisation of Petroleum Exporting Countries to increase oil output to soften the world market.

In April 2002, the NDA government had deregulated the oil sector and removed the shackles of the administered price mechanism from the domestic oil companies.

This was in keeping with the earlier decision of the Congress government. Oil companies were now free to revise prices of petrol and diesel every fortnight to keep them in tandem with the international prices of the two fuels.

Earlier, the practice was to announce only the upward revision in the retail prices of the two petroleum products. But after the decontrol, the oil companies reduced the prices of petrol and diesel on at least five occasions.

This was possible because of the policy decisions of the NDA government. The UPA government should have also come out with a pricing policy before increasing the prices. India is a petroleum-deficient country and we have to import 70 per cent of our crude oil requirements.

Last year, these imports cost the country Rs 84,000 crore (Rs 840 billion).

Therefore, to meet the "vagaries of the international oil market, it is imperative for the government to come out with a policy that ensures that the consumer is not subjected to harsh price increases.

There is one part of the government's decision that I welcome -- the cut in excise duty. This will certainly help the oil companies. However, there is no effort on the part of the government to pass on this benefit to the consumer.

During the NDA regime, the excise duty was reduced by 2 per cent and the benefit was passed on directly to the consumer.

During the election campaign, the Congress, the Left and all other parties that were in the opposition at that time, had made petroleum prices a major poll issue. I will be watching with interest how they respond to the situation that will emerge from time to time.

As told to Pradeep Puri