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Playing good politics with fuel is bad economics

Written by: Sunil Fernandes
Published: Wednesday, March 21, 2012, 9:37 [IST]
 
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Playing good politics with fuel is bad economics

In a recent interview on a television channel, R K Singh, Chairman of BPCL was in a precarious position answering questions on why fuel prices were not raised, despite huge losses on petrol everyday for oil marketing companies.

The Chairman was at pains in explaining that they very much wanted to effect an hike, but the government could intervene and their consent was necessary. The news anchor even went onto ask the chairman, if his company was an “NGO”.

BPCL like other PSU oil marketing companies continues to lose immensely every time petrol and diesel are filled into vehicles.

BPCL is a listed company and is also answerable to private shareholders. Never mind that losses at oil marketing companies could see private shareholders erode wealth, since most of the oil marketing companies are listed entities. It's a strange paradox that the more you sell, the more you loose. Being a listed company BPCL is incurring huge losses by selling petrol at least Rs 5 lower, after taking into account crude prices and refining charges.

Perhaps, Singh like several at the helm in other oil marketing companies find themselves “tied” and asked to swim. Petrol prices though deregulated cannot be hiked, as consent is needed from the government. Wonder why there was a need to deregulate petrol prices in the first place, if ultimately it would not be aligned to market prices and needed the government's nod. In any case oil companies have lost a staggering Rs 1,50,000 crore.

The government however, is unwilling to hike rates. And it has got a reason to push the blame on “Mamata”, even if it chooses not to act because of its own compulsions. The government's own performance was pathetic in the recent assembly elections, that another price hike would be suicidal for the government, as rising petrol prices ends up stoking inflation. And inflation hits the aam admi, which of course means that the UPA ratings plunge to new lows. At least the government has got a cushion and an excuse in Mamata.

Crude meanwhile continues to boil, as funds rush to buy black gold. And if it continues to remain at elevated levels and the government acts against price hike, there is no way that Pranab Mukerjee can bring down the fuel subsidy bill by Rs 25,000 crore as indicated in the Union Budget 2012-13. Bringing down the fiscal deficit to 5.1% of GDP as estimated in the Budget is therefore wishful thinking. In any case good politics is bad economics and will lead to an ugly fiscal deficit.

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