Economy Dec 28, 2012
By R Jagannathan
If Manmohan Singh pulls this one off, he will have partially re-earned the title of reformer.
As reported by Firstpost yesterday, the petroleum ministry under Veerappa Moily wants to raise diesel prices to market levels over 10 months, by hiking it Re 1 at a time till losses are eliminated. The current losses per litre of diesel are around Rs 9.28, and raising it by Rs 10 over 10 months would eliminate the subsidy altogether. If that's done, the next step would be deregulation of diesel prices-which would constitute true reform.
Similar plans are afoot in kerosene, where the idea is to raise prices by Rs 10 over two years-what The Economic Times calls a "snail's pace". At 41 paise a month, the change would barely be noticed for a while till it crosses some significant psychological figure-say Rs 20 a litre or even Rs 25 (the current subsidised kerosene price in Delhi is just Rs 14.79 a litre).
But even after all this slowly-silently-gently approach, the kerosene subsidy problem will remain unsolved. Reason: the current subsidy is nearly Rs 31 a litre, and raising prices by Rs 10 over two years will barely bridge a third of the gap. Hardly worth the effort.
In cooking gas, the government is going the other way, of offering nine subsidised cylinders instead of six. This can only increase the subsidy bill for the oil companies.
But even if we accept that the direction of reform is more important than its pace, the petroleum ministry's moves need to be backed by the Prime Minister and Sonia Gandhi. The PM seemed to be already on board when he made a pointed reference to the need to cut energy subsidies at yesterday's National Development Council meeting.
He said: "Coal, petroleum products and natural gas are all priced well below international prices. This also means that electricity is effectively underpriced, especially for some consumers. Immediate adjustment of prices to close the gap is not feasible, I realise this, but some phased price adjustment is necessary."
Is it just coincidence that the petroleum ministry's 10-stage diesel hike plan comes along with the PM's talk of "phased adjustment"?
Whether the PM's statement implies endorsement of the petroleum ministry's plans or is merely an exhortation for political consensus-which may not be forthcoming as we head for a series of state assembly elections next year, followed by the general elections in 2014-we will know in the next few weeks.
However, there is little doubt that the key to India's economic revival lies in fixing the energy economy - the whole caboodle.
The numbers are already frightening-and one is talking only of the oil sector here. In April-September 2012, the oil marketing companies lost over Rs 85,000 crore, and the petroleum ministry's subsidy demands are heading for Rs 1,65,000 crore in 2012-13, of which Rs 60,000 crore will come from mugging the oil and gas producers -ONGC, Oil India and Gail.
The balance will have to come from budgetary subsidies, of which only Rs 28,000 crore has been paid out till December. P Chidambaram has to fork out another Rs 75,000-and-odd crore by March 2013, assuming the government does not have the gumption to okay the petroleum ministry plan.
The ministry's proposal to raise prices by Re 1 a month for 10 months is doable, but politically the key consideration would be whether to get the whole exercise over with by one or two big changes, or to administer it in homoeopathic doses.
The PM has, of course, called for price increases in power, coal and gas-though they will not all be done together. That is a bigger challenge than oil, which is the best place to start.
If the ministry gets it way, it will mean the government has decided to take the bull by the horns rather than tinker with non-solutions like hiking taxes on diesel cars.
More than Manmohan Singh, it is Sonia Gandhi who needs to sign on to Veerappa Moily's solution-by-pinpricks proposal.