Slick Engineering

THE five-month-old Gujral government has finally mustered up courage to raise the prices of petroleum products. Though the hike was modest—petrol by Re 1, diesel by Rs 1.80 and LPG by Rs 15—the government, unlike the usual myopic practice of raising prices and sleeping over it, has for the first time come out with a long-term plan to tackle the problem of petroproduct pricing by announcing that it will altogether dismantle the administered price mechanism (APM)—that is, government control of petroprices—over the next two years. Political pressures—from within the government, outside the government, and especially supporters of the government from outside—had managed to defer the price hike till the oil pool account deficit reached an alarming Rs 22,000 crore. Of this, the government owed oil companies Rs 18,200 crore. This is the gap between the costs oil companies incur to produce and import petroproducts and the revenues they generate, selling these products at government determined prices.

The reason the oil pool account is in deficit is, of course, subsidies. Huge amounts are doled out to subsidise kerosene and liquefied petroleum gas (LPG). Kerosene prices have not moved since 1992-93. As a result, the subsidy bill on the poor man's fuel is well above the Rs 5,000-crore level. Meaning, every Indian gets, or gives, depending on where you stand—Rs 52 as subsidy on kerosene. On the other hand, India has the second highest retail price of petrol in the world. Only Sri Lanka is ahead of us.

Sources say the original plan was a 47.5 per cent increase in the price of each of the petroleum products. This would have amounted to a rise of Rs 10.22 for petrol, Rs 3.88 for diesel and Rs 56.43 for LPG. But this, against a defiant Left and a critical Opposition, could not materialise. All that the cabinet could agree to, on its September 1 meeting, was a nominal revision in prices. Even this did not please the Left.

But the modest price hike has been made up for through some masterly financial engineering (see chart), which actually turns the oil pool deficit into a modest surplus, with neither the government nor the oil companies apparently worse off for it. At least in 1997-98. The government has announced it will manage the oil pool account judiciously in the coming two years—till the APM is done away with—to see that there's no deficit. The success of this entire exercise will hinge on whether the government can keep to that commitment. Not everyone is impressed. Former director of NCAER, S.L. Rao, says the signals given by such low increase in diesel prices are not good. Says he: "With such a modest and disbalanced increase, it will be wrong to say that we are at par with international retail prices. Why should we not increase diesel prices more when diesel and petrol are priced close to each other in most countries?" The government should have the courage to raise kerosene prices without hurting the poor by first identifying them and working out a mechanism to protect them rather than subsidising kerosene.

He does have a point: a study by NCAER (National Council for Applied Economic Research) showed that the low price of kerosene encourages hoarding and gets directed away from the poor. It also shows that kerosene adulteration of diesel is as high as 40 per cent. The point that kerosene is a poor man's fuel has also been countered. According to the study, kerosene is used by the well-off for cooking in areas where LPG supply is erratic.

However, political parties are not happy even with this modest increase. The Left has vowed to avenge the government's blatant disregard of their views. "Though we are unhappy at the move, we are happy that we could keep the quantum of increase low," says CPI(M) politburo member Sitaram Yechuri.

BJP thinks likewise and the Congress feels that the people have been betrayed. But in the absence of any viable alternative proposal to handle the crisis, the government's plan went through. Petroleum minister Janeshwar Misra feels that the impact of the current hike—the 14th in the last decade—on inflation will be marginal. The actual effect on the Wholesale Price Index (WPI) will be 0.74 per cent. That means WPI inflation could rise from the currently low 3.75 per cent to 4.49 in the coming months, but that too is hardly a worrying figure.

Can the Gujral administration now deliver on its promises? Removing APM in two years is laudable, but can the government, which took almost a year to effect a modest price hike, muster the political will that's needed? Will it even last the two years?