As the budgeting exercise at the Centre gets underway, it is plain that open-ended consumption subsidies on petroleum products like

diesel, in the backdrop of elevated prices of crude oil, are unsustainable. Proactive policy action is called for, certainly after the elections in Uttar Pradesh and four other states. In the interim, the Centre needs to commission studies and quasi-experiments on how retail-price revision of diesel, by far the most-used petroleum product, affects transport costs and haulage. A glance at the published trucking rates would suggest that the charges are now highly competitive, and not decided on a cost-plus basis. The notion that rationalising diesel prices would escalate and set the ball rolling on the inflation front, especially food and transport prices, may well lack empirical evidence. Price correction in diesel should actually arrest inflationary expectations, and so put paid to the uncertainty about price revision in the pipeline. In any case, open-ended oil subsidies entail high economic costs across the board. As various studies show, the overall costs of underpricing are likely to be far greater than the costs in an accounting sense, which anyway now add up to about 1.5% of GDP, and so are already very high and ill-affordable. Worse, the bulk of the subsidy is appropriated by the non-poor. Further, subsidies for oil consumption, by lowering end-use prices by fiat, can perversely discourage conservation and come in the way of more efficient energy usage. There are other ill-effects of oil subsidies. For instance, unrestrained subsidies would reduce the incentives to rev up productivity gains in the logistics chain, including in the supply and delivery of petroleum products. Now, in a regime of administered prices, there is a general lack of transparency in the retail pricing of petro-goods, with much scope for cost-plus padding and other rigidities. In parallel, direct open-ended subsidies for oil products are a sheer drain on government finances. In a poor country, the funds are better spent on other deserving heads, such as health, education and social welfare. It is welcome that the opaque practice of issuing off-Budget oil bonds to oil companies seems to have been discontinued. But handing out cash on account of open-ended underpricing is still wrong. It is true that in the last couple of years, the government has set in motion a series of halfmeasures and tentative moves, to try and cope with the fallout of hardening oil prices and insufficient revision of retail prices. The retail prices of petrol have been decontrolled, on paper at least, although the actual go-ahead to revise prices upwards appears to require government okay. And the Centre has taken an in-principle decision to decontrol prices of diesel, the main petro-product. But hard decisions have been thoroughly lacking. Populism seems to raise its ugly head now and again when it comes to retail prices of petrol, diesel, etc. Note that about a decade ago, when global crude prices hit rock-bottom, the then-government did decontrol prices of automotive fuel, but quickly backtracked once price rose. Fast-forward to the here and now, and the volumes are far larger, as are the likely macroeconomic effects. For instance, given the 'under-recoveries', the gap between realisations less notional costs, on account of retail sales, the unscheduled borrowings of the three main oil marketing companies can soak up over Rs 1 lakh crore, and imply dearer cost of funds for all and sundry. There would be yet more negative implications. Besides, subsidies on petro-goods would come in the way of diffusion and commercialisation of emerging, green technologies at huge national cost. While on paper oil-subsidy schemes are supposed to add to the purchasing power of poor households, the ground reality is that the poor can actually end up worse off with the subsidy usurped by others. The point is that we need to end the distortions and anomalies rampant in the pricing of diesel, petrol, etc. The

Centre has temporarily dropped the duty on crude and reduced excise duty on diesel, but we need to rationalise taxes and duties on automotive and aviation fuel on a long-term basis. After all, heavy taxation of petro-products verily block retail price revision in the face of dearer crude imports. Also, the regime of cascading taxes on oil products is fiscally quite dated. Abroad, in the mature markets with progressive high taxes on oil, value-added taxes are generally in place so as to avoid cascading of indirect levies along the value chain, with provision for tax set-offs for duties paid. While the decision to decontrol diesel and have market-determined prices is pending, we need to study international experience of extending the valueadded tax regime to petrogoods so as, for instance, to boost incentives for modern transport fleets with suitable tax design. The bottom line is that it would be unfortunate if the government is unable to meet its targets on the fiscal deficit front simply because of populism and slippages on oil subsidies.