Reform fuel pricing

Synopsis: Govt must follow a transparent fuel pricing mechanism.

Introduction

The government’s approval of the full privatisation of Air India has raised expectations that the disinvestment of Bharat Petroleum Corporation Limited (BPCL) may be carried out effectively and as planned before the end of this financial year

Yet there are broader questions about the management of the fuel economy. The biggest question surrounds the management of the prices of petrol, diesel, and liquefied petroleum gas or LPG.

A successful bidder for BPCL will want to set prices to maximize profits. They would be justified in expecting that the broader market for fuel is not being undermined by government policy towards the two other OMCs.

Hence, the disinvestment of BPCL is the right time to introduce the long-term tax and pricing reform.

What are the issues related to fuel pricing in India?

Government control: State-controlled oil marketing companies (OMCs) continue to be given pricing-guidance by the Union government, even after the administered price mechanism has been discarded. For instance, price changes have often been put on hold in times of political sensitivity, such as before a crucial Assembly election.

Problem of Under recoveries: Under recoveries denote an enforced per-unit loss on sale of petrol, diesel and LPG. At the moment, given the global run on the price of crude oil and high domestic taxes, the old problem of “under-recoveries” seems to have re-appeared.

Issue of subsidised fuel: OMCs are not only having to manage under-recoveries, according to reports, on every litre of petrol and diesel sold, but also have to deal with a loss of Rs 100 or so on every gas cylinder sold in the household retail market. The government yet to reimburse OMCs the sums they have lost under the Pradhan Mantri Ujjwala Yojana, which add up to Rs 3,000-4,000 crore.

High fuel tax: The government has, on the one hand, tried to maintain some elements of price control, while on the other hand it has turned to fuel taxes to fill the giant gaps in its revenue. Though a high tax on carbon is a good thing, but it should be logical and economy-wide and not imposed largely for fiscal reasons.

What needs to be done?

Direct transmission of global fuel prices to consumers, with OMCs competing on the margins.

A consistent fuel tax that is in keeping with the shadow price of carbon and is shared between the Union and the states

Direct subsidies, out of the Union Budget, for those sections of society that are most vulnerable to fluctuating or high prices for petrol, diesel and LPG.

Source: This post is based on the article “Reform fuel pricing” published in Business Standard on 21st October 2021.