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Economy Nov 7, 2011

Petrol prices: Is the govt running for Nobel prize for unpopularity?

By Firstbiz Editors

Will they, won't they? Newspapers are filled with conflicting reports about oil marketing companies opting for a possible rollback of the petrol price hike enforced on 4 November.

Not only is the Opposition unhappy with the price hike, even the UPA government's allies have expressed anger at the move of state-run oil marketing companies. In particular, the Trinamool Congress, led by firebrand Mamta Banerjee, is meeting Prime Minister Dr Manmohan Singh this week after threatening to pull out of the alliance because of the hike.

While the Business Standard said a rollback is unlikely, The Economic Times said prices could be reduced by 30-50 paise per litre soon. Of course, the reason being given for this sudden change of heart by state-oil companies is a fall in the international price of crude oil in recent weeks.

Really? It's hard to see how they could have missed that fact when they were busy raising petrol prices last week.

More likely, it's a case of a struggling government leaning on oil-marketing companies to reduce prices to fend off political and consumer discontent.

According to The Economic Times, the government has threatened to curb the freedom of oil marketeers if they do not pass on the benefit to consumers when prices fall.

CPI members protest against petrol price hike in New Delhi on Saturday.PTI

While it is true that international oil prices have fallen recently, the sharp fall in the value of the rupee against the dollar has offset those gains. Because India imports more than 70 percent of her oil requirements, the cost of imports have increased, despite a fall in prices.

An Indian Oil Corporation official also admitted that the recent petrol price hike was triggered primarily by the depreciation of the rupee against dollar. A change in the value of the dollar by one rupee causes a loss of 90-95 paise per litre of petrol, he said.

While a price rollback is good news for consumers, it's bad news for companies, who are being forced into making price decisions on the basis of political threats.

The real problem is India's flawed oil policy: as long as diesel, kerosene and domestic LPG are subsidised, companies will try to compensate for the losses from selling those products by raising the prices of deregulated fuels - petrol and jet fuel.

Until this policy is changed, everyone will continue to suffer. Oil companies will pile on more losses, consumers will keep facing higher prices at the pump even when international prices are falling and the government will have to keep doling out ever-increasing subsidies.

One senior government official, attempting to justify the administration's position on the fuel price hike, told Business Line that "the government does not want to become unpopular, but sometimes it is forced to take unpopular decisions. It is not that the government is running for the Nobel prize for unpopularity. The government does unpopular things only when it becomes inevitable,'' a senior official in the government told Business Line.

Here's a thought: perhaps next time it could try doing something before it becomes inevitable? That way, it's less pain for everyone involved.

by Firstbiz Editors

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