Opaque subsidies – Govt control returns to the oil sector

Source: The post is based on the article “Opaque subsidies – Govt control returns to the oil sector” published in Business Standard on 7^th August 2023.

Syllabus: GS 2 – Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

Relevance: concerns with state regulating oil prices

News: Previously, the government claimed to deregulate petrol and diesel prices and eliminate indirect fuel subsidies, which were seen as positive reforms.

However, it seems that the government has come up with a system by which it continues to control prices at the pump while concealing the subsidies involved.

What efforts have been taken by the government to control prices?

The Union Budget has allocated approximately 30,000 crore rupees to support three state-controlled oil marketing companies (OMCs) in their climate initiatives.

It is expected to balance out the losses the OMCs have faced because of under-recoveries, caused mostly due to unchanged fuel prices when global oil prices changed due to the Russia-Ukraine war.

However, this capital infusion might also involve the government once again taking a stake in HPCL and controlling the oil prices.

Hence, cooperative efforts of the three government-owned enterprises to preserve consumer prices and absorb losses highlight that political factors influence oil prices rather than the free market.

What will be the impact of the state again regulating the oil prices?

First, it will not only negatively impact future finances but also hinders India’s environmental transition, which was supposed to be funded by investments from existing oil companies.

Second, this could further convince voters that politicians play a role in determining oil prices, strengthening their lack of trust in the free market.

Hence, transparent subsidies, independent of the price actually paid, are the only way out.