Fuel Administered Price Mechanism
The government has dismantled the Administered Price Mechanism (APM) for fixing the petrol and diesel prices and has introduced dynamic fuel pricing.
Background
Two decades ago, the then United Front government led by Prime Minister I.K. Gujral had set in motion the dismantling of APM just before it lost its power.
Later, the Congress government led by Prime Minister Narasimha Rao had set up the ‘R-committee’ under the chairmanship of petroleum secretary Vijay Kelkar to come with a blueprint for dismantling APM. The R-committee eventually came up with an action plan. The timetable was charted out to carry out full deregulation by 2002. But, with the increase in the prices of the crude oil, the deadline was missed due to lack of political support.
After the United Progressive Alliance came to power in 2004, it formed a committee first under former Reserve Bank of India governor C. Rangarajan, then under Planning Commission members B.K. Chaturvedi and Kirit Parikh.
In June 2010, the government deregulated petrol prices.
In October 2014, diesel prices were decontrolled by the Prime Minister Narendra Modi-led National Democratic Alliance.
Dynamic Fuel pricing
State-run oil marketing companies (OMCs) such as Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum have been revising prices of the fuel on the 1st and 16th of every month, depending upon average international price in the preceding fortnight and the currency exchange rate. In dynamic fuel pricing, the oil retailers will be daily revising the retail selling prices of petrol and diesel.
Significance
The move will give free hand to the oil marketing companies (OMCs) to take independent decisions based on import parity and market forces, while determining the pricing of petroleum products. It will help the public sector oil units to register profits. It will also reduce the burden on exchequer.
With the move, India joins countries such as the US and Australia where fuel prices are fixed in tandem with the price of crude oil. The move will make India as a competitive market economy with the entry of more private players.
Daily price changes would make sure that prices would not rise or drop sharply. Also, it will ensure the benefit of even the smallest price change would be passed to the dealers and the consumers. Daily price change of just a few paise will not bring shock to the customers.
Oil marketing companies will be in a better position to carry out price hikes without worrying about political backlash.
Challenges
The sustainability of this mechanism may face challenges when international oil prices start hardening. It is yet to be seen how the Indian consumers react and adapt to price increase. Prices of petrol and fuel may vary from state to state. The fuel price in hinterland is expected to be more than that of the coastal states.
