Oil Price Deregulation – What is it for India?

Petroleum, in one form or another, has been used since ancient times, and is now important across society, including in economy, politics and technology. Most governments across the globe consider oil price as one of the important economic indicators. Any rise or fall of oil price is felt by all, which includes business houses, stock markets and policy makers. India has for long controlled retail prices all petroleum related products (and still continues…). While one hand this subsidy is good for retail consumers, it puts a huge burden on state run oil companies. The recent expert panel, led by planning commission member Kirit Parikh has suggested oil ministry of India to look at deregulating oil prices in India. It is yet to be seen if the cabinet accepts the recommendations provided by the panel as any price hike in petrol and diesel would have repercussions not only at the political level, but will also impact various other related industries.
Let’s take a closer look at what deregulation means and how does it impact the government, Oil PSU’s and common man.
What is deregulation?
Deregulation generally means the lifting of government control and letting market forces work in the business.
For the local oil downstream industry, the concept of deregulation covers:
1. Price decontrol and
2. Removal of restrictions on the establishment and operation of facilities as well as the importation and exportation of crude oil and petroleum products.
So why have Indian government regulated oil prices??
More than any economic reason I feel that oil and petroleum related prices have been regulated by government more because of socialist or populist reasons. Even, the current price hike is not being politically favored by most UPA allies. Why? It’s not rocket science to understand that any rise in oil prices would cause social unrest and would eventually lead to vote bank issues. So, even though state run oil companies are selling petrol, diesel, kerosene and LPG below the market price, government policy makers are happy to provide subsidy on all petroleum related products. Also, our government feels that by deregulating oil prices it would stoke inflation, which might lead to prices getting increased in all other commodity items. Which might be true….but beneficial to our economy when looked from a long term perspective.
Currently, according to oil minister Mr. Murli Deora the new report has been submitted to the PMO and cabinet for approval. While on one hand ONGC, BPCL, Indian Oil and other state oil PSU’s see it as a game-changer and big sentiment booster, it remains to be seen to what extent the government policy makers agree to deregulate oil prices in India.
Will this benefit India??
Coming to the crux of the issue, will our government deregulate oil prices? If so, what would be the immediate impact on our economy? How will it impact in the longer run?
Let’s look at a transparent picture of the situation.
Global oil rates have touched an all-time record high of $135, and currently at $74 a barrel which roughly translates into a loss of Rs. 1,00,000 crore on the sale of petrol, LPG gas, diesel and so on because the Government is selling all of the above at subsidized rates. If they sell at the real rates (Rs. 15 app. more), then inflation will rise, income levels with proportionately drop, and there will be abject poverty. This being the election year, UPA (Congress) Government has been caught in a Catch-22 situation where it has 2 alternatives –
• Let the price of petrol stay as it is. Due to little or no hedged positions in oil, Government and state-run oil firms are likely to get a beating, as mentioned before, to the tune of Rs. 1,00,000 crore.
• Increase prices of petrol to avoid losses. This transfers all the heavy cost onto the consumers. Being the election year, these voters are going to vent their frustration by voting against congress led UPA Government.

A full deregulation might prove to be detrimental, so government should look at a staggered increase in price and eventually deregulate oil and other petroleum related price over a period of time. If prices are decontrolled, petrol and diesel would be dearer by Rs 4.72 and Rs 2.33 a litre, respectively. But on the brighter side it would lead to a more competitive market, encourage investments and also remove any cross product subsidies (like implicitly regulation favors diesel product over petrol). The main problem with the government has been the system of subsidization by giving oil bonds to make up for a part of the revenue lost on selling fuel below cost. The social and fiscal costs arising out of the current method of subsidization, and taxation are very severe forming a big part of the deficit our country faces at the moment. The new system would help in freeing up all the subsidy money and cut down our deficit thus reducing government borrowing which in turn would check inflation. The money can be better utilized in infrastructure and social and education sectors.
In the short term increasing fuel prices can cause inflation due to an increase in transport costs of the commodities, however sustained study of prices in the US, Europe and Japan where fuel prices are not regulated do not show much effect of fuel prices on the prices of commodity. Even the Indian economy during the OPEC embargo years of the 1980’s did not inflate much on the sudden increase in prices.
In the longer run India’s demand for primary energy by 2030 is projected to be four times what we are consuming today (423 million tonnes of oil equivalent). Hence, it’s imperative that we need to move towards an open and fair market priced petroleum products.

Does India need a women’s reservation bill?

Last couple of days India has witnessed a huge furor over the Women’s reservation Bill, which essentially talks about giving 33% legislative seats to the women of the country. While at one hand we see parties like congress and BJP pushing for the bill, some other regional parties like RJD and Samajwadi party has been clearly raising their voices against the bill. Historically, the reservation bill was introduced by the HD Deve Gowda led government way back in 1996. Though it has been presented on various occasions in the parliament, it could never be passed as a constitutional amendment due to lack of political consensus. If the bill is passed it would signal a very important milestone for the UPA government.

But for now let’s look at what could be the potential impact both on the positive and negative side if the bill finally gets passed.
At the positive outset the bills makes reservation mandatory for a third of the seats for women in national state and local governments. This would put India in league with many of the developed nations where women hold many of the important governmental roles. Today in India women represents a mere 11% in the chief legislature, Lok Sabha, this is very much below the average across the world. Women in India have always been deprived and discriminated, and this would bill will go a long way in ensuring political and economic empowerment of women. More than anything else it would provide them with an opportunity to represent the community in a more equitable manner. Also, women are characterized as more caring and humble than male counterparts, and this would probably lead to a more stable democratic government.

On the negative side it might just prove to be a notion that woman empowerment can only be achieved through parliamentary representation. As a matter of fact, any parliamentary body is not a literal mirror of the society where every section needs to be represented in a fairly distributed manner. Rather it is one elected body where laws of the land get formulated and the future roadmap of the nation gets decided. For any woman it would be much more credible to be elected based on merit rather than sex. The Bill in its Current form envisages reserving 181 seats in the Parliament for women. In practical terms its impact would be that 181 male members of Parliament would not be able to contest elections if the bill is passed. Also, there is to be a rotation of seats, i.e., a male member of Parliament cannot represent the same constituency for more than two consecutive terms. But overall the bill does not talk about how more women representation would able to fight the injustice and social prejudice against girls and women, so prevalent in our society.
From a political standpoint it makes sense to have some quantum of reservation, but the percentage is debatable. Not just for the vote banks for also from a long pending reform perspective. More representation of women in the legislature would surely give more voice to women community and help in the general upliftment of India socio economy.

But my take is that any reservation is an acknowledgment of the failure of the state and the political system. Even after 62 years of independence every year so many girl children get aborted, killed or bartered. Primary necessities like education and food is also deprived from a girl child. I do not think just my having more women legislatures would change any of those ills from our society immediately. But hopefully passing of this bill would be a step towards the right direction, because standing where we are today India does need women's reservation. I feel as more educated women enter the mainstream political arena, we can expect improvement in girl child education level, sex ratio, removal to certain extent of dowry system, early child marriage and lastly women being treated with respect.