Fuel Is Out Of Government Control But Who Will Ensure Right Pricing? : You Need An Effective, Independent Regulator And Competition To Flourish

With petrol and diesel linked to market prices, oil firms would now worry only about kerosene, whose consumption is in any case under check, and cooking gas, where the subsidies would now be more transparently reimbursed, reducing leakage and misuse…


you-need-an-effectiveThere should be no doubt that there is a fresh momentum to the Narendra Modi Government’s decision-making process after the Assembly elections in Maharashtra and Haryana. Just a day before the results were declared on October 19, diesel prices were decontrolled, giving a boost to the state-owned oil marketing companies as they became free to price diesel just as they have been doing for petrol since June 2010. On the same day, the long-expected hike in natural gas prices was announced, though the increase was moderated — dashing the hopes of the country’s largest private-sector producer of gas.
And the sale of subsidised cooking gas was mandated to be through the direct benefits transfer scheme, which meant the use of Aadhaar identity numbers. Two days later, the Union Cabinet approved an ordinance to pave the way for e-auction of all coal mines that were declared illegal by the Supreme Court, raising legitimate hopes that the uncertainty in the coal sector after the apex court’s order some months ago would come to an end.
Success for the Bharatiya Janata Party (BJP) in the two Assembly elections must be one of the factors that made the Government more decisive. The momentum can also be explained by the BJP-led Government’s desire – and indeed its need – to make the best of the advantage that a newly elected Government has in the first year in office. All that is clearly understandable. What, however, is not understandable with as much clarity is the manner in which these decisions were made public. It is difficult not to notice an element of stealth and opacity in the manner some of the key provisions of the new decisions were framed, which obviously had significant implications for governance. Whether this happened by design or lack of planning is a moot point.But that impression is inescapable.
Consider the decision on price decontrol for diesel. The decision was big, as it would wipe out a substantial part of the oil marketing companies’ under-recovery. With petrol and diesel linked to market prices, oil marketing companies would now worry only about kerosene, whose consumption is in any case under check, and cooking gas, where the subsidies would now be more transparently reimbursed, reducing leakage and misuse. The books of the state-controlled oil companies – often awash with red ink because of these subsidies – would now look more healthy and promising. But the bigger gain of the diesel price decontrol move was something the Government completely played down. The decision rolled out the red carpet for private sector oil companies to enter the retail marketing of petroleum products, now that the two largest categories – petrol and diesel – can be priced freely.
Already, Reliance Industries and Essar are reported to have begun preparations to enter petro-product retailing — a move they had abandoned in the early years of the last decade when the United Progressive Alliance Government had gradually rolled back the marketing freedom that had been partially given by the Atal Bihari Vajpayee Government. Nobody, however, has talked about or even noticed the potential competition the diesel price decontrol decision would unleash in the Indian oil retail market. Nobody has even underlined the need to unshackle the state-controlled oil marketing companies and further professionalise their management so that they can face competition from the private sector oil giants.
Will they meet the same unfortunate fate as befell their counterparts in the aviation and telecommunication sectors, with a rapid decline in their market share and rising losses? Or will they, like state-controlled banks and insurance companies, be able to hold their own against competition from the private sector? Nobody has the answer, but the fact that this is not the subject matter of debate is a bit disconcerting. Something similar is likely to happen in the coal sector after the ordinance on coal has been promulgated. A decision contained in the ordinance but not adequately publicised is the provision that allows commercial coal mining by the private sector. In other words, the monopoly of Coal India, the public sector giant, has been removed as private sector companies can now mine coal and sell it in the market.
It is a big decision. But there has been virtually no debate over it — and, worse, neither the Coal India management nor its majority shareholder, the Government of India, seems to be conscious of the implications of the opening up. Since its formation in the early 1970s, Coal India has never been exposed to competition. And when its managers have tried to optimise its revenues by boosting sales through e-auctions, it has been asked not to be a spoilsport and jack up the cost of producing power. When such a company is suddenly faced with competition from the private sector, the likelihood is that it will simply buckle under the pressure of the
marketplace. While big decisions are important to unshackle the economy and revive the manufacturing sector, it is equally important that adequate care is taken to ensure genuine competition by beefing up the existing enterprises even if they belong to the public sector.
Not only do you need an effective and independent regulator, you also need competition to flourish. And allowing the public sector to function with autonomy and professionalism should be a necessary part of that process, at least till such time you decide to privatise them.

-BS

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