The empowered group of ministers has finally taken important decisions on the Kirit Parikh

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committee report, which had recommended decontrol of petrol and diesel prices and increase of Rs 6 per litre in kerosene price and Rs 100 per cylinder of LPG price.

The ministers have decontrolled petrol price so that now it would reflect the international price and cost of supplying it both at the refinery gate and the retail level. Diesel price has been increased by Rs 2 per litre and it will also be decontrolled eventually. Kerosene price is raised by Rs 3 per litre and LPG price by Rs 35 per cylinder. These should be looked at in the light of our situation.

Consumption, production & imports

In 2009-10, India produced 35.1 million tonnes (mt) of crude oil, mainly by public sector companies ONGC (Oil and Natural Gas Corporation) and OIL (Oil India Corporation), and imported 158.9 mt of crude oil. With an installed refining capacity of 178 mt of crude oil per year it produced 178.9 mt of oil products of which 50.7 mt were exported. India also imported some oil products and the total consumption was 138.2 mt with nearly 80 per cent of domestic consumption based on imports. Net oil and product imports amounted to $59.36 billion (Rs 2,73,958 crore), which constituted 31.4 per cent of total export earnings in 2008-09.

The four major oil products -- petrol, diesel, kerosene and LPG -- constitute 60 per cent of oil product consumption in the country. The prices of other products have already been decontrolled and are market-determined.

Who bears the burden?

The first thing to recognise is that any change in policy puts burden on someone or other. The committee’s recommendations are based on consideration of who bears what burden. Our recommendations put little burden on aam aadmi and are good for the country.

The households in the poorest 10 per cent in rural areas, who use 3.5 litres of kerosene per month, spend 2 per cent of their total expenditure on kerosene. Incomes of rural people have increased since the kerosene price was last revised in 2002. Taking increase in agricultural income as a lower bound on the increase in rural incomes an increase of Rs 3 per litre of kerosene would put an additional burden of Rs 10.5 per month and keep the share of kerosene expenditure in total consumer expenditure below the level in 2002.

Sixty per cent of the LPG subsidy accrues to the richest 30 per cent of the population. The poorest 40 per cent in rural areas get only 0.6 per cent of the subsidy. It is, however, true that some burden will fall on the middle class. However, the price increase of Rs 35 is much less than the increase in per capita income of urban population since 2004 when the price of LPG was last set.

The impact on inflation

Certainly the increases in prices will have some impact on inflation in the short run. However, in the long run, the increase in energy efficiency will reduce the impact and the impact would be smaller than that of current policies.

The first thing to recognise is that we import 80 per cent of our crude oil in hard currency. The cost of the petroleum products must be borne by someone or other. Who bears this cost, what impact it would have on price levels and on whom the eventual burden falls will depend on the policy measures used. What alternatives do we have?

When the crude price increases on the international market and it is not passed through to the consumers, the cost will have to be borne by the oil marketing companies (OMCs). Since private OMCs would get out of a business if they make losses, it will be left to public sector OMCs to supply petroleum products at prices below their costs. If the OMCs are asked to bear the losses, they would go bankrupt. It would seriously compromise our energy security. Thus the government finances the losses.

The government can finance them by raising taxes, cutting down expenditures, borrowing from the market or printing money. All these have consequences for price levels and economic growth both of which affect people’s real incomes.

Suppose the government finances under-recoveries through cutting down expenditure. Such cuts are often put on public investments or in public programmes. If investment in irrigation is reduced or outlays on programmes of Bharat Nirman are reduced, the burden falls on the poor.

If on the other hand deficit financing through market borrowing is done it has its own consequences. Interest rates will increase, borrowing costs will increase, investments will go down and production costs will increase. This will increase prices also. With higher fiscal deficit, the country’s credit rating will go down and costs of international borrowing will also go up. Financing under-recoveries by issuing bonds to public sector undertakings, or PSUs, is really financing by borrowing money. Financing under-recoveries by printing money would have direct inflationary impact.

Thus, no matter what is done when crude price increases, domestic price increase is inescapable. The burden falls on everyone. With reforms at least the burden falls on users of petroleum products.

Kirit S Parikh is a former member of the Planning Commission and chairman of Integrated Research and Action for Development