Petrol hike on soft global levels is short-sighted: Narayan

S Narayan, former bureaucrat and economic advisor to the PM, tells CNBC-TV18 his opinion about oil minister's statement of considering a rollback of the petrol price-hike after observing the trend over the next few days. Narayan explains if this opens an opportunity for a partial rollback to coincide with the fortnightly review.

Below is an edited transcript of the interview to CNBC-TV18. Also watch the accompanying video. 
Q: What do you make of the oil minister's statement?
We have to look at it over a period of time and I think people are particularly upset because international oil prices are softening. To increase petrol prices when international prices are softening appear to be a little bit shortsighted.
In 2002, Yashwant Sinha, Ram Naik and I attended a meeting where we concluded that it was more sensible to initiate gradual increases fortnightly. I wish the government had used the same model.
The other problem is that the gap between diesel and petrol is widening. So increasing the price of just one product actually increases subsides on diesel rather than reducing the burden on the government. Q: And that burden will continue because the oil minister very clearly said today that as far as diesel, LPG and kerosene are concerned, the government is not living in a political vacuum. Oil marketing companies (OMC) and the oil ministry do not have the power to revise prices because it will have to be a decision taken by the EGoM and no EGoM has been notified. So there is neither political will nor the appetite as far as diesel, LPG and kerosene are concerned. So the subsidy black-hole continues to be there?
Actually it could worsen on increased differentiate between petrol and diesel. The more you push people into consumption of diesel and conversation of their vehicles to LPG you are increasing the  subsidy burden and not reducing it.
We must remember that petrol forms only a small portion of the value chain of the petroleum consumption and therefore actually it’s diesel and LPG, which forms the bulk, close to 50% of the total consumption. So you are in fact exacerbating the problem rather than reducing it.
So, I am a little surprised that these kinds of statements are coming from the government at the moment. Q: I also want you to explain the statement as far as cutting taxes are concerned and individual state-governments, such as Kerala and Uttarakhand, have taken the initiative and cut taxes. The Centre says it they will perhaps cut VAT on May 28. Jaipal Reddy says that the government will consult with states as far as cutting taxes are concerned, but the finance ministry has been very clear that it doesn't want to cut taxes at this point in time, his fiscal math is already poor, it's going to look worse if he were to cut taxes at this point?
I think it's very important that the states should look at their own budgets and to any extent possible, relieve the customer of the burden because the total tax burden on the petrol bill is close to 50%, which is totally unacceptable.
Nowhere else in the world does 50% of the price paid for petrol go to the state exchequer. So, there is an opportunity for the Centre also to reduce taxes.
For example, in 2005-2006 the government had a system of a fix tax. I wish the present government could use this tax model which would then specify a specific duty on a litre of petrol rather than on the basis of the price.
If the states were to adopt this it would reduce the burden substantially and this presents an opportunity for both the Centre and the states to reduce the tax burden. It’s unfortunate that the finance minister has made a statement like this because there is opportunity with flexibility to reduce taxes. Q: What is the signal that you read? Now we have seen the government  move on petrol and there hasn’t been a rollback yet. The government is silent as far as diesel, LPG and kerosene are concerned. Would you see this as the government being serious about pushing the reform agenda? There are a lot of reports that government is going to push FDI in multi-brand retail and civil aviation before the next Parliament session starts. Do you believe this is a government that's serious about pushing the reform agenda?
I think that this particular step (of increasing the price of petrol) announced very suddenly a couple of days ago is due to the panic on the rupee deteriorating very sharply and the desperate need to send out a signal that the government was in control.
Unfortunately that signal has been partial and has not carried through the reforms even in the petroleum pricing policies.
So, I am not really sure whether the government has a strategy mapped out to go ahead with further reforms. In my view these decision are just knee-jerk reactions to a particular situation.