It is high time that petrol and diesel prices were decontrolled taking advantage of low inflation and global crude prices, the Economic Survey said, while criticising the government for its "imperfect" handling of oil price hike.
The Survey made suggestions for sweeping reforms in the energy sector, including limiting subsidised cooking gas to domestic consumers to 6-8 cylinders per year.
Coming a day after the government announced an ad-hoc increase in petrol price by Rs 4 a litre and diesel by Rs 2 per litre that effectively buried all hopes of freeing auto fuel prices, the pre-Budget Survey said the entire rise in raw material price should be passed on to consumers.
The doubling of international crude oil prices to $70 a barrel since December had warranted Rs 5.82 a litre increase in petrol and Rs 3.62 per litre hike in diesel rates.
The message was clear, "Decontrol petrol and diesel prices", with the Survey saying that "as long as the domestic prices remain below the cost of import, demand would continue to grow accentuating the negative impact.
"At times higher inflation and on other occasions political imperatives have prevented a better alignment of fuel and fertiliser and food prices with the border/market prices."
In practice, the issues of prices were addressed somewhat "imperfectly" through a sharing formula that represented a mix of government subsidy, taxation of rents and some pass through, the Survey decried.
State oil retailers should be given freedom to fix rates of diesel - the most used fuel in the country that is commonly used in agriculture - till such time that crude oil price is below $80 a barrel. For petrol it set no such ceiling.
When prices cross $80 a barrel, a measured policy response system and financial buffer should set in to insulate the farmers and truckers from abnormally high rates, said the Survey, which was tabled in Parliament on Thursday.
Calling for reforms in petroleum subsidies to reduce leakages and ensure targeting, the Survey said: "Limit LPG subsidy to a maximum of 6-8 cylinders per annum per household. Phase out Kerosene supply-subsidy by ensuring that every rural household (without electricity and LPG connection) has a solar cooker and solar lantern."
"...With a moderation in global commodity prices and moderation in domestic inflation, it is, perhaps the best time to address some of these issues," it said.
The Survey said the rise in global oil prices in 2008 - some of which was permanent and some temporary - had a strong adverse impact on the balance of trade. "Ideally, the entire permanent element of the price rise should be passed through along with part of the temporary increase.
It said the shaving-off of over $100 a barrel from the historic rise in international crude oil prices to $147 a barrel in July 2008, was expected to be a temporary.
"This (the rapid decline in oil prices) was expected to be a temporary respite with oil prices likely to rise along with a recovering global economy," the Survey said.
Mirroring India's stand at global forums that speculative trading was responsible for the spike in crude prices, the Survey said: "It is debatable where rising prices were an indication of green shoots of recovery or a result of position taken by financial investors, seeking to benefit from global recovery expectations."
"There are nevertheless some inconclusive indications that financial investors have been at play, as oil prices have risen sharply, despite build-up of inventories and forecasts of lower global demand."