Fuel retail: Job half done

In a major step towards further decontrol of the petroleum-marketing sector, the government announced recently that retail marketing of petrol and diesel — petrol pumps, for example, — would be open to any private sector applicant with a net worth of at least Rs 250 crore. Earlier, applicants had to commit to investing at least Rs 2,000 crore in the sector, which strictly limited the number of players. It is possible that now companies or conglomerates that do not want to invest in, say, refining will bring investments into the oil-marketing sector. Large organised retail chains can build petrol pumps as part of their stores. So far, the fuel distribution network has been dominated by the state-controlled oil-marketing companies. There are fewer than 7,000 privately-run petrol pumps in India, barely over 10 per cent of the number of public-sector petrol pumps. The hope surely is that more private-sector investment in the area will firm up the distribution network, create greater stability in supply, lead to an increase in jobs, and so on. From that point of view, this is an entirely sensible decision and should be welcomed. It is also worth welcoming because it, in a way, opens up another state sector to further competition from the private sector.

However, from one major point of view, this reform is unlikely to have the positive effect that is desired. Usually, when competition is increased in a sector, there is an effect on prices. In many sectors, if greater private-sector participation is permitted, then the consumer benefits directly through lower prices. This is not likely to be the case in this business, however. The problem here is that the state-run oil companies have a stranglehold over price setting. While the prices of petrol and diesel have nominally been decontrolled, in effect there continues to be some level of political input into the price — as is visible from the freezes put on price increases around sensitive elections. Thus, there is a lack of transparency as to the price of petrol and diesel, which makes it difficult for market competition to work properly. For instance, private operators would lose if public-sector retailers are asked to hold an increase in prices for political reasons.

The ideal situation is that the private-sector marketing companies be incentivised to buy from multiple different refineries, including those in the public sector, and that this be used to create an open and transparent pricing regime for petroleum products that passes on the benefits of lower prices to the consumer. Of course, a large proportion of what the consumer pays goes to the government anyway in the case of taxes. And there is no real reason for those carbon taxes to be reduced. But that does not change the fact that competition on costs, margins, and service quality can both provide a better service to consumers and at a better price even if taxes remain high. The crucial question will be if the government can follow this up with pricing reform to its state-controlled refineries as well. 

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