By Narendra NathanShare prices of PSU oil marketing companies like IOC, HPCL and BPCL tumbled on April 11 based on reports that government has asked them to accept a cut of one rupee in their marketing margins(i.e.

not to increase prices in line with international prices). Their share prices did not recover even after oil minister Dharmendra Pradhan denied any such move.

This is because the market does not believe the minister.

The first round of oil price reform was supposed to happen in April 2004 and the same got derailed because of the NDA government headed by AB Vajpayee.

Therefore, market participants will take the words of the minister only with a pinch of salt, especially in an election year. The real test of any reform comes when the prices go up and not when prices are going down.

Most of the economic turnaround and controlling of triple deficits (budget, fiscal and trade deficit) during the initial years of Narendra Modi was because of the fall in crude oil prices. Governments (both at the Centre and in states) kept on increasing the taxes (central excise and VAT) when international crude oil prices came down, saying the government also wants to have a share in the fall.

Brent variety of crude is still trading 33 per cent lower than its prices when Narendra Modi came to power ($72 now compared to $107 in May 2014).

Though the rupee weakened by 11 per cent in the middle, the effective price is still down by 25 per cent.

That means domestic prices of petrol and diesel are at all-time highs only because of these tax increases. Markets scepticism is mostly because the government has refused to cut the duties.

Since government increased the duties when prices came down, they are morally bound to reduce them when the oil price is moving the other way round.

Central government should take the initiate by reducing the central excise.

The net impact of 1 rupee reduction in excise will be more than 1 rupee because of the resultant reduction in states’ VAT which is based on ad valorem. The government’s action also raises a pertinent question: Why should commercial enterprises with public shareholders be forced to share the government’s burden of controlling prices If the government wants to keep prices under control, this portion should come in the form of a duty cut or as a subsidy. More importantly, this is one of the biggest reforms by the government and if it goes back on this, who is going to believe it when it talks about reforms again And this is happening at a time when we are getting huge investments into the oil and gas sector. Only recently did Saudi Arabia’s Aramco decide to set up a giant refinery in Ratnagiri, Maharashtra, in collaboration with PSU oil majors like IOC, BPCL and HPCL with an estimated investment of around $44 billion.

Dilly-dallying like this will only scare away investors. What if the oil prices continue to climb and the reduction in duties is not enough This can happen if the international crude oil goes back to the previous peaks of $147 hit during July 2008.

The base case assumption now is that this may not happen due to the increased shale oil production from US.

However, the fight between US and Russia over Syria is getting complicated and oil prices may go to those levels in the short term if there is a wider war in the Gulf region.

Even if that happens, government should allow an increase in oil prices.