The increase in fuel prices is not a new phenomenon. What is new is that previously petro prices were administered by the government; since June 2010 the price level is determined by the companies. This calibration is called ‘determined prices’. These companies effected a 5.6 per cent hike in the price of petrol in December 2010. Within a month, they announced an increase by another 5 per cent, resulting in an effective increase of nearly Rs 6/litre in just one month. The price of diesel has not been changed, but these companies have signalled that the cost of diesel and LPG will also go up in due course of time.

Prior to June 2010, the government used to administer petroleum prices which would be revised once or twice every year. The hike was never so frequent and so substantial in a particular year. There were instances when petroleum prices were even reduced with the fall in crude prices in the international market. More important, the Central government never provided a huge government subsidy in its endeavour to keep petro-prices under check.

On the whole these companies were earning a profit, though their profits were not very huge under the administered price regime. But they were also not a liability on the public exchequer.

In an attempt to justify its earlier decision to allow companies to fix petro-prices, the government claims that because of state control and the effort to keep the price of diesel, petrol and LPG under check, petroleum companies were incurring huge losses and the government was not in a position to compensate them. In the government’s reckoning, these companies may still incur losses because they will charge lower prices for diesel and kerosene. The government claims that as crude oil prices continue to rise and consumption of petro-products is ever so high, the losses of these petro-companies may rise further. The only way, therefore, to save these companies from losses is to allow them to determine the cost plus prices.

But these arguments do not hold much water. These companies have been making huge profits in the past. In 2008-09, ONGC earned a net profit of Rs 16,041 crore, GAIL Rs 2814 crore and Indian Oil Rs 2570 crore. This was incidentally the year in which the highest-ever crude prices were recorded in the international market. There is little logic in the government’s argument that the new arrangement has been put in place to save petro companies from huge losses.

On the contrary, because of the increasing demand of these petro products, the government has always gained significantly by way of taxes [excise duty, VAT and so on]. These companies also provide dividend to the government from their profits in proportion to the Centre’s shareholding. According to provisional estimates of the Ministry of Petroleum and Natural Gas, the contribution of the oil sector to the Central and state exchequer has been a booming Rs 183,861 crore in 2009-10. Therefore, the government ought not to be reluctant if it has to occasionally compensate for the losses of petro-companies.

The government’s argument that it was providing a huge subsidy to keep petro-prices low is not correct. During 2009-10, when high crude prices were recorded, the Central government’s subsidy was only Rs 14954 crore, whereas a provision of only Rs 3108 crore has been kept for 2010-11. This subsidy is mainly for kerosene, diesel and LPG. The government has promised to continue the subsidy on these commodities. Therefore, the burden on the exchequer will persist.