Why actual fuel de-control still does not exist in India

Providing OMCs with the freedom to price automotive fuels above cost should come as a respite for the government, investors as well as investors who were long worried about the pernicious impact of high under-recoveries (overall fuel subsidies came in at Rs 1.43 lakh crore last fiscal).

But has the government really freed fuel prices? It does not appear so.

As an editorial in the Business Standard points out today, the government’s move to hike excise duty on petrol and diesel twice in the past 15 days and the OMCs’ decision to not pass on the hike to consumer reeks of lack of freedom.

As oil prices dropped over the past few months, OMCs had started making profits (or over-recoveries) on sale of these products for the first time in years and it was this profit that the government took away in the form of the excise duty hikes.

While one could term the government’s decision as an intelligent economic (adds Rs 20,000 crore to the kitty of the government that is struggling to meet its fiscal deficit target for the year) and political move (by not allowing OMCs to pass on the higher cost to consumers), the move clearly defies the spirit of reform the government has been espousing.

As the BS puts it: “After trumpeting its commitment to the deregulation of prices, it has violated the spirit of deregulation, and what that reform was supposed to achieve. The increase in excise duties will not be passed on to consumers, according to the OMCs. These OMCs are, of course, state-owned; and it strains credulity to suppose that this decision, which is clearly not in their commercial interest, was not born of political pressure. If the government is forcing the OMCs to set prices according to the dictates of political masters, then it can hardly claim deregulation has happened.”

The argument that the government is still calling the shots with respect to pricing is further bolstered by the fact that the major fuel retailers, IOC, BPCL and HPCL price the fuel at almost the same price.

For instance, IOC’s current price of petrol in Delhi is Rs 63.33 while it stands at Rs 63.36 and Rs 63.37 for HPCL and BPCL, respectively.

If oil companies are truly allowed deregulated prices, there would be at least some difference in the price of the different companies – in a free market, at least some would have tried to garner more market share by lowering prices.

Compare that to the US, for instance, where gasoline prices could differ from not just company to company or state to state but even at different pumps within a city based on demand and supply.

If that were not the case and if the Indian fuel market was truly deregulated, then as hedge fund manager Samir Arora pointed out in a recent tweet: “How is it free pricing if all oil companies follow exactly the same policy. Someone can accuse them of being a cartel?”