India’s Fuel Pricing Policy : Analysis – UPSC GS3

India’s fuel pricing regime has evolved over the years.

In 1995-96, the government thought of moving from an administered price mechanism on a cost-plus basis to market-determined consumer prices for petrol, diesel and other fuels. Based on the Nirmal Singh Committee recommendations full dismantling of oil prices was announced in 2002.

As the oil prices started moving up in 2004, the then government restored the cost-plus pricing system to ease the burden on consumers. It also subsidised prices for transport fuels, LPG and kerosene through the Oil bonds mechanism which sought to provide for oil marketing companies’ under-recoveries.

The cooling oil prices in 2015 saw the then government implementing the market price mechanism again. Given that the crude oil prices remained low, it was easy to implement the market price mechanism without giving much discomfort to the consumers.

Though India officially has a deregulated pricing regime, in recent years, this practice has been put on hold during election campaigns. Hence there has been a stop-and-start approach to price changes despite a free pricing regime.

The de-administered pricing regime has witnessed repeated deviations. India has not been able to manage a meaningful de-administered price over a long period of time. This does not augur well for the Indian economy as it renders it vulnerable to global crude price pressures.

This stop-and-start pricing approach for fuels also adversely affects interest from global investors in the Indian oil and gas sector.

Notably, the adherence to market administered price policy as the crude oil prices have reached a high does not augur well for economic recovery in India in the post-pandemic phase. If the fuel prices are passed on fully to consumers and industrial users, they will generate adverse economic effects. It will result in high retail inflation which leads to an adverse income effect and thus leads to a subdued consumption expenditure recovery.

In the short term, the only quick solution could be a reduction in excise duties or taxes. This will help lessen the burden on the consumers. Though this will have a fiscal cost in the form of reduced tax revenues for the governments, this is necessary to ensure economic recovery.

In the long run, the governments should diversify their revenue generation from different sectors, moving away from the heavy dependency on the oil sector. India must shed its reliance on easy fuel taxes.

Also, a strategy for dealing with the vulnerability of the Indian economy to global crude price rises should be developed.