All''s not well with oil

The Indian consumer is
18 June 2004

Petroleum minister Mani Shankar Aiyar is usually a witty man. But on Tuesday 15 June, when he finally announced the government's decision to raise the prices of petrol, diesel and LPG cooking gas, he was very serious indeed.

Any increase in the price of diesel can raise the costs of everything, everywhere, fuelling inflation. Cooking gas being the household fuel of middle class urban India, is a very sensitive subject, not least with the left parties propping up the present government. Petrol, of course remains everybody's favourite whipping boy, being still seen as the fuel of the rich, even though millions of middle class two wheeler owners feel the pinch.

The petroleum sector is in a pickle thanks to the former NDA government, which froze prices of petroleum products from December 2003, in its effort to create a 'feel good' factor in the run-up to the parliamentary election in April-May 2004. In the interregnum, global prices of crude oil climbed steadily from around $30 to around $38 a barrel, before touching an all-time peak of $42 for a day about two weeks back.

The 'modest' increase in the prices of petrol, diesel and LPG, has been combined with a slew of tax rationalisation measures to mitigate the losses suffered by the predominantly state-owned petroleum companies. With the left parties and the Congress party's coalition partners spewing fire and brimstone on the issue, kerosene — the poor man's fuel — has been left untouched. The programme to phase out subsidies has been given a year's holiday.

As usual, the decision has received flak from both ends of the eco-political spectrum, with 'reformers' arguing that continuing the subsidies regime spells the doom of reforms and a likely reversal of the trend towards reduction in the fiscal deficit, while the odd couple of the leftists and the BJP have deplored the increased burden on the common man.

This reflects the fine balancing act which team Mani Shankar Aiyar, P Chidambaram and Manmohan Singh have pulled off. They have raised the prices of petrol by Rs2, diesel by Rs1 and LPG by Rs20 per domestic cylinder, having firmly resisted the populist pressure to keep them unchanged.