IIM study suggests deregulation of oil sector with free play for fuel pricing

The oil sector has to be radically reformed under a completely deregulated regime that would allow both private and public sector firms to freely price fuel as they deem fit, A study carried out by the Indian Institute of Management (IIM) Ahmedabad suggested.

"Reform of the oil sector is long overdue. The problems in the sector emanate from the structure of central taxes and the system of subsidisation through prices," the study said.

Under the current regime, the prices of petrol, diesel and domestic LPG and kerosene are under the control of the government. The government compensates the public sector firms through a complex system that has resulted in squeezing the liquidity with retailers and draining the resources of upstream firms.

Part of the revenue lost by the public sector oil firms on below-cost sale of fuel is compensated through the issue of oil bonds to the firms, while upstream operators such as ONGC, bear the rest. "The social and fiscal costs arising out of the current method of subsidisation, and taxation are very severe," according to the study.

The study, while suggesting radical reforms, goes on to say "complete deregulation of the sector allowing oil producers, oil refiners, marketing companies, and integrated operators to price their products as they deem fit" was the need of the hour.

The study says the fiscal costs were very large and much higher than what was reported in the budget, since these did not account for the costs of diversion and tax avoidance resulting from differential pricing.