Was the oil price cut hasty?
6/2/2009  |  The Economic Times

The APM is dead, long live the APM

The brand-new minister of a brand-new government was taking the first meeting of all his honchos and mandarins. Crude was selling for $37 a barrel that week. The minister wanted to know price forecasts for the coming festival season.

All the smart folks around the table knew what the minister wanted to hear. So, the overwhelming opinion was that prices were going to soften, maybe to the twenties. The lone dissenting voice was ignored. The minister went away dreaming of the price cuts he would announce, with cameras zooming in. Crude price had surged that winter.

During the tenure of the UPA government, crude price has gone from $37 to $147 to $37. The global economic downturn is causing demand destruction; the impact of the consequential supply contraction will be realised in the years to come when the prices will rise again. In the immediate context, the same UPA government proudly proclaims that India's GDP growth will be sustained @7%, the highest among all countries. Where is the fuel for this growth? We survive on a genset economy. Without unrestricted supply of diesel, life cannot be sustained in India.

The first UPA minister had ignored the suggestion to set up a Price Stabilisation Fund. At least one of the several high-powered committees appointed by the prime minister also made the same suggestion, and like all the reports of all such committees, precious little happened. The second (and last) UPA minister has never talked of any structural correction.

The prevailing low-price scenario is a renewed opportunity to create the mechanics of price stabilisation, and to correct the inherently fraudulent formula for domestic pricing. The NDA minister had announced the end of administered price mechanism (APM) and promptly dumped the follow-up process of oil sector reform; the UPA ministers' agenda is innocent of reform. Since successive governments agree on administering oil prices, the least that the government should do is to do it well! The APM is dead, long live the APM. The camera is the problem, cancelling out all concern for tomorrow.

Subir Raha, Chairman, Team Raha Ideation Ltd.
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