Tuesday, May 19, 2009

Decontrolling Fuel Prices

There is a lot of euphoria over the stable government for next 5 years in India. Already scores of policies – disinvestment in PSU’s, Pension reform etc are being talked about and expected in the near future. All these will have a major impact on the country. But one reform which will have a direct and visible impact on the people (or aam aadmi as congress likes to call) will be the decontrolling of the fuel prices. [link]

Simply put, the price for which we get petrol and diesel from the petrol will be much more variable as they will move according to the global market prices. The artificial controlled prices of fuel in the recent past have been both a headache and leverage for the government. Leverage because a reduction in fuel prices can bring about a change in sentiments of the nation in its favor and headache because of multiple reasons - various quarters pressing it for reduction in prices, deep losses for government owned Oil companies, anti-government sentiment when prices are increased. In fact often long meetings are held before an increase or drop in prices is announced.

Once prices become market controlled, a lot of this headache gets off the government’s head. Of course, there are a lot of quarters which need subsidy in fuel – agricultural sector, poor (for kerosene oil and cooking gas). But effective means are being employed for them to get the subsidy by the way of smart cards and coupons. These are much more efficient than a subsidy based pricing for the whole of the nation. The variable prices will lead to reduction in tremendous amount of consumer surplus which all of us enjoyed.

The benefit of this will also be seen in other spheres. With highly subsidized prices we could get the fuel cheaper especially when the global prices were touching $150. Now there will be an incentive for both the fuel intensive industries as well as the government to focus on greener and renewable sources of energy. The risk of variability in fuel costs (which form a major component of the costs) will force to invest in alternative sources with lesser dependency on oil and hence lesser risk.

There will also be some encouragement for companies to enter in oil and petroleum sector making it more competitive. Essar and Reliance were wiped off when they established their own petrol pumps but could not match the government controlled prices. Now there will be more incentive for private biggies to enter and may be give some challenge to the well established PSU’s who dominate the oil market in India.
The move is a good one but Mr. Prime Minister needs to look out for the initial unrest and confusion that this move can cause.

No comments: