New Delhi, Feb. 3: An committee of experts headed by former Planning Commission member Kirit Parikh on Wednesday recommended deregulation of petrol and diesel prices. It also recommended that the domestic price of LPG be hiked by Rs 100 and kerosene by Rs 6 per litre.

At current international crude oil prices, deregulation of auto fuels will result in a Rs 4.72-per-litre increase in the price of petrol and a Rs 2.33-per-litre increase in the price of diesel.

However, given current political realities, the government is unlikely to accept the recommendations of the committee in their entirety. The government is already under attack from the Opposition over high food prices. Any hike in fuel prices at this time will have a backlash. A diesel price hike would also result in a further increase in the cost of food and other products as the cost of transportation will rise.

"We will present a view before the Cabinet in a week. It will be the Cabinet which will take a final decision," said petroleum minister Murli Deora. Petroleum secretary S. Sundareshan said the ministry has been directed by the Prime Minister to immediately process the report. But when asked whether the government would implement the recommendations immediately, the secretary was quick to add that there is a "definite difference between processing and implementation".

Two earlier committees had recommended deregulation of fuel but nothing happened due to political opposition. A committee headed by the present chairman of the Prime Minister’s Economic Advisory Council, Dr C. Rangarajan, had in 2006 advised linking the prices of petroleum products to the cost of crude oil. In 2008, a committee headed by Planning Commission member B.K. Chaturvedi had also given a similar recommendation.

Asked about this, Mr Deora said: "I hope history doesn’t repeat itself."

The government will try to carry out a fine balancing act between being populist and worsening the financial condition with the fiscal deficit at a 16-year high. The finance ministry is already reluctant to fulfil its promise to completely compensate PSU oil marketing companies for losses incurred in the sale of LPG and kerosene. Also, with the government no longer dependent on the Left’s support, it could try to be a bit bolder.

Mr Parikh said the current policy of subsidies in the petroleum sector is not sustainable. "The weakest user of petrol is a two-wheeler driver. Deregulation will increase his monthly bill only by an average of Rs 20 to Rs 30 per month," he said. On diesel, he said the agriculture ministry uses diesel prices while calculating minimum support prices for farmers and, therefore, they will not be impacted very hard.

He said that as electricity has not reached the whole of rural India, the committee has recommended that the subsidy on kerosene should continue. "But due to kerosene being used to adulterate diesel, we feel the price of the two products should be close. The current price of kerosene, Rs 9 per litre, was fixed in 2002. Taking the increase in income levels in rural areas into account, we have recommended this hike," said Mr Parikh. On LPG, Mr Parikh said the government wants to see LPG used in more and more homes, rather than wood which can cause health problems. "Therefore we have again said that here too the subsidy should continue, but taking into account the increase in the per capita income in urban areas we have recommended a Rs 100 hike in the price of LPG," he added.

On the impact of deregulation on inflation, Mr Parikh said it wasn’t an issue as the government will then have to take other steps to meet the burden, like hiking tax, which will have the same impact.

The committee has recommended a formula by which the Centre’s under-recovery remains Rs 20,000 crores despite the increase in international crude prices. According to it, any increase in the subsidy burden will be met by ONGC and Oil India through additional profits earned from the sale of gas from nominated fields. The deregulation of petrol and diesel prices will mean a level playing field between the public and private sectors. This could encourage private companies to set up more petrol pumps.

Pawan Bali and Mukesh Ranjan