The Chaturvedi Committee final report recommends a phased increase in crude distillates’ prices and the cutting down of subsidies, and is a step in the right direction. These include a monthly increase in the price of a litre of petrol by Rs 2.50 (until March 2009), and of a litre of diesel by Rs 0.75 (until 2010). Another recommendation of direct consequence to the middle class is the limit of 6 subsidised refills of LPG cylinders per consumer/connection over a year and the gradual removal of the LPG subsidy over a three-year period. Other recommendations attempt financial re-engineering, at the macro level, of measures already put in place after the sudden, sharp increases in global crude oil prices. These relate primarily to the medium- and long-term viability of the governments’ oil bonds and their ultimate discontinuation; the inappropriateness of taxes on any “windfall gains” accruing to oil refiners and extractors; tinkering with the excise and customs rates and moves towards replacing the cylinder-based LPG system with piped natural gas.

The loss due to the difference between cost and consumer price is currently borne by the oil marketing companies (OMCs) which are in turn compensated by oil bonds. These are little more than a band-aid, and will certainly tell on the fiscal health of the nation. When the OMCs pledge those bonds and raise money to sustain their critical operations liquidity will be sucked out of the banking system and impact investible funds across the board.

If the committee’s recommendations are not accepted, the estimated loss on sale of crude distillates will be Rs 2,11,400 crore in the current year alone. The revenue deficit in this year’s budget is about Rs 56,000 crore. These are large numbers: it is hardly surprising that the report says that “the government should disengage from the process of pricing of petroleum products, and allow pricing to be an outcome of a competitive market process”.

... contd.