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How We Never Learn

Omkar Goswami

Any adult can make a mistake once. Even twice. But when many adults responsible for the economic life of our nation enact the same mistake time and time again, you need to sit up and worry. Nothing illustrates this better than the license-control-commissar approach to the pricing of petrol, diesel, kerosene and LPG.

But I am getting ahead of myself. Here’s the story so that you realise how peculiarly atrophied we are when it comes to decision-making.

In January 2002, the price of crude was, believe it or not, averaging less that $19.50 per barrel. It was when oil pundits spoke of a so-called ‘long-term equilibrium’ of oil ruling at around $20-$25 per barrel. It was also a time when a very far sighted man called Vijay Kelkar was the Secretary of the Ministry of Petroleum and Natural Gas.

Kelkar figured that $20 per barrel was the best time to start dismantling the regime that controlled the prices of petrol, diesel, kerosene and LPG. A clever man that he is, Kelkar set up a committee to examine the issue. Unlike many such committee reports, the R Committee report (R for Restructuring) was an excellent piece of work that leveraged the milieu of soft crude oil prices to outline an eminently feasible timetable for decontrol.

Unfortunately for Kelkar and the R Committee, neither did his minister, Ram Naik of the BJP, nor the wider political class care for the report. Naik ensured that the report was dead on the water; which suited every politician and most babus very well because, as we well know, being ‘commissars for the people’ runs deep in the Indian blood. Atal Behari Vajpayee had other fish to fry; the report asphyxiated in some dusty filing cabinet; and Vijay Kelkar went on to become the Finance Secretary and moved on to even higher things.

What a chance we lost! The chart plots something quite simple. It uses data for international price of Brent crude and Delhi pump price of petrol; indexes both to 100 starting June 2002; and then tracks how these have moved over time. It is a frightening graph.

Right up to September 2003, there was a parity between crude and petrol prices. It made a great deal of sense to decontrol then, because there was still a tidy refiners’ margin for converting crude to petroleum products. By December 2004, Brent had risen to $39.60 per barrel; worse than before, but still doable. By December 2005, Brent had risen to $56.86 and the run rate had become steep. A year later, Brent was at $62.47 and the Indian oil majors had begun to post large losses. Instead of re-calibrating retail prices, the government dithered and decided to bequeath oil bonds to IOC, HPCL and BPCL. Even here, the sarkar was niggardly.

By December 2007, Brent was at over $90 per barrel, and the asking rate was impossible. The government would have needed enormous political courage to decontrol at that stage, which it didn’t have. By mid-May 2008, Brent was $123 per barrel and rising. With Delhi petrol prices ruling at Rs.45.52 per litre, the game was over. Not even six sixes in the last over would do.

Reflect on what we have done. We have bankrupted three good public sector companies: IOC, BPCL and HPCL. We have not allowed prices to ration demand, as it would have had markets played a role. Now we are talking of rationing petrol and diesel. Worse still, there are crazy ideas about raising petrol and diesel prices by over Rs.10 per litre in cities, but leaving village prices unchanged. You don’t take the right decision at the right time; you bankrupt oil companies and the fisc; you don’t allow prices to temper demand; and then you think of dual pricing which always fails before the ink is dry! What do you say about adults who make the same mistake time and time again? Words fail me.

 Published: Business Standard, May 2008


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