Successive governments, all conscious of their political health, have preferred to leave oil out of their reforms diet. Thus, the government of the day has retained a vice-like stranglehold over the pricing of mass consumption petroleum products such as petrol and diesel rather than allowing market forces to determine their prices. Within this progressively regressive approach, the present Congress-led government seems to be more resistant to price hikes than the previous BJP-led one. While the previous National Democratic Alliance government effected 24 price hikes in its last two years in office, the current United Progressive Alliance government has only managed five in the last two years (the sixth should have happened by the time this magazine hits the news-stands). This litmus test offers the best indicator of reforms in the petroleum sector, where the singular major issue of price controls has locked out market forces to a good extent, leading to runaway demand in products like LPG, which is underpriced to the extent of over 50 per cent. The UPA's intent to reform (in this case, increase prices of petro-products), most pundits believe is limited by the communist parties, its key allies. If the fiscal impact of this price-management has been limited, it is because the UPA has been willing to give away more than the NDA in terms of taxes on petroleum products (by reducing them). This accounts for almost 50 per cent of the government's indirect tax revenue and only a booming economy has helped the UPA balance its books.

Two years into the UPA's rule, this could well be the best metric to assess the government's economic orientation and ability to push through key reforms. The petroleum minister during the NDA's rule, Ram Naik, a former accountant, believed in raising prices of petroleum products soon after there was an international spurt in crude prices, as long as there wasn't Assembly election in sight. If there was, he'd wait to get it out of the way. The abhorrence with which the communist parties view a hike in the prices of petroleum products is understandable: they see themselves as the champions of the little people, and, fortunately for them, they now have the legislative clout to make themselves heard. There's no debating the fact that allowing market pricing could see the prices of petrol and diesel (and other petroleum products) to rise sharply, perhaps even enough to derail the great Indian economic story. Restructuring the taxes on petroleum products-this will have to be part of a larger exercise in tax reforms-should prevent that from happening. Unfortunately, tax reform is maybe just marginally tougher than oil reform.

It's not only Left-driven ideologies that promote price controls in the petroleum sector

Ironically, while the public sector oil companies are bleeding, Reliance Petroleum, a private-sector refiner and retailer, has quietly built a 8 per cent market share. The company is bleeding too, but it would have been far more difficult for it to build this share had the competition been profitable and, consequently, aggressive in terms of marketing initiatives. Reliance Petroleum's current cost of market penetration is likely far lower than what it would have been had the public sector retailers had their house in order or if the government had allowed a market-based pricing of petroleum products.

History reveals that it is not only Left-driven ideologies that promote price controls in the petroleum sector. Way back in the 1930s, in United States, the Mecca of capitalism, Standard Oil of California, the forerunner of present day oil major Chevron, was keen that Washington issue dictates to the states to control oil production, since crude oil prices were crashing. Then president Franklin D. Roosevelt, the man behind the New Deal that revived the country's economy, assigned this task to trusted lieutenant and Secretary of the Interior, Harold Ickes. Thus was born the Oil Code, that set production quotas for states. These controls had their side effects: bootlegging of oil became a fledging industry, and came to be known as the 'hot oil' industry.

Evidently, at some level, oil has remained ideology neutral.

INSTAN TIP
The fortnight's burning question.

Are rising interest rates squeezing liquidity in the Indian economy?

No.. Amit Mitra, Secretary General, FICCI

There is no liquidity squeeze in the market, as is evident from stable call money rates. Huge dollar inflows have helped maintain liquidity levels. The stock market slowdown is due to a tightening of margins on individual participants and is not a function of a liquidity crunch in the banking system.

May be. R. Seshasayee, President, CII

Interest rates are hardening in the US. RBI has projected slower non-food credit growth this year. Housing and personal loans have also become dearer. RBI should step in to ensure that this does not dampen investment climate.

No. Sanjiv Goenka, Vice Chairman, RPG Group

Rising interest rates are not squeezing liquidity but are certainly adding to costs. People will be wary of borrowing but that should have no impact on liquidity. I hope to see interest rates going down.

-Compiled by Aman Malik

Q&A
"India Provides An Ideal Test Bed"

A decade after entering the Indian market, the $12 billion (Rs 54,000 crore) Schneider Electric, is looking to enter the next stage of growth here. Jean-Pascal Tricoire, 43, Chairman and CEO of the company, tells Rahul Sachitanand of BT that Schneider will make India a test bed for global initiatives and an export hub.

Why have you chosen India as a location for your broadband-over-power lines initiative?

We have innovated a new way of delivering high speed Net connectivity using power lines and we feel that India provides us the ideal test bed to try out this new service. We will launch this service at select locations in Bangalore by the end of June and then consider a wider roll-out.

Schneider is scaling up its manufacturing in India. What are your plans on this front?

Our plants in Nashik, Baroda and Chennai cater to the domestic market. Now, we're planning a unit in Hyderabad to focus mainly on exports and it could eventually become one of our global hubs for manufacturing.

Will you consider listing your Indian arm on local stock exchange(s)?

We haven't taken a look at that option yet. Some of our competitors (Swedish power major ABB, for example) have listed their local entities very successfully and this is certainly something we will consider in the future.