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Fuel hike: Too little too late
June, 05th 2008

 The fuel price hike announced by the government is a clear case of too little too late. It covers less than 10% of the losses of oil companies, still leaving the fisc and the oil companies to bear the bulk of the burden.

Worryingly, the government has almost ruled out more price hikes if crude remains stable and has not indicated the course of action should crude prices rise, which is likely. Clearly, the intent is to limp along for the next twelve months and leave it to the next government to grapple with the issue.

At current international crude prices, the total under-recovery of oil marketing companies is estimated at Rs 2,45,305 crore for 2008-09. The product price increases petrol Rs 5/litre, diesel Rs 3/litre and LPG Rs 50/cylinder would yield only about Rs 21,000 crore. That the price hike only covers a fraction of the under-recovery of oil companies underscores the extent of mismanagement of the oil economy.

Having failed to revise prices periodically, the government found itself unable to pass on to the consumer even a quarter of the global oil price spike. Things got worse with the issue of inflation getting deeply politicised. It is the country and not the government that will now bear the cost of this political expediency.

Over 55% of the under-recovery is to be met through oil bonds of Rs 135,000 crore, a liability on the future. Public sector oil companies, upstream and marketing, have to pitch in with Rs 65,000 crore, again a tax on the nation. The only direct cost to this government, to the extent it constrains expenditure, is the Rs 22,600 crore foregone in tax revenues due to the reduction in excise and customs duty.

The only silver lining is that the oil marketing companies would have some breathing space. They would get an additional about Rs 44,000 crore through product price hike and reduction in various duties and the oil bonds that they receive from the government would be more liquid. Clearly, some sort of institutional arrangement is required to depoliticise the oil economy.

The government could make price revision legally mandatory, should global crude prices move up by a certain percentage. It should also address the issue of off-budget funding of consumer subsidies that have made a mockery of fiscal responsibility legislation.

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