Domestic prices cannot be ring fenced

Domestic prices cannot be ring fenced
"This is not an original piece .. its taken from Economic times .. found it really interesting "

The international crude prices are rising relentlessly. The price per barrel which used to be $58 has become $73. Though India imports 70 percent of its crude, the Government hasn’t increased the domestic price of the petro products. This has more to do with political expediency (self interest) than economics or logic. The price of petro products is fixed by administrative fiat under the administered price mechanism (APM).


This asymmetric response exacts a huge toll on the economy. First, the price signals are suppressed thereby, not leading to the natural demand compression that normally should follow a price rise. Second, the OMCs (Oil marketing companies) are forced to sell at a lower price leading to daily losses of about Rs 195 crore. In a bid to ease the OMC’s problems, the petroleum ministry has demanded that oil bonds be issued as compensation. These oil bonds are nothing but an off-budget way of financing their losses.


This means that the unwillingness of the government to raise the prices will put the extra burden on the tax payers instead of the oil consumers. The common man subsidizes the consumption of the relatively better off. This is an instance of Government decisions that look good from the outside to the aam admi but actually end up doing more harm than good.