It is now generally recognised that the government cannot continue subsidising petroleum products at present levels. Minister for Industry, Commerce and Supplies Rajendra Mahato told a press conference in Birgunj, four days ago, that there was no alternative to raising the prices of oil without delay. The ministry, he said, decided to go for a hike after the finance ministry refused to release Rs.2 billion that NOC had requested to clear the dues to Indian Oil Corporation (IOC), the sole supplier of the petroleum products to Nepal. Because of NOC’s failure to pay IOC, there have been frequent disruptions in the import of oil, which explains the oil shortages in the country for the past couple of years. NOC’s loss in the current month alone is reported to be Rs.250 million, and this figure varies from month to month, depending on international price changes. NOC has been unable to keep pace with the global price swings - a phenomenon that has persisted for several years.

In recent times, a not-so-edifying pattern of disruptions in supply for non-payment followed by the government unwillingly releasing money in partial payment has been seen. The oil deal between Nepal and India is purely a commercial transaction, and, unsurprisingly, the supplier expects timely payment. Over the past several years, successive governments, taken together, have increased the prices several times, but always leaving a gap between international and internal prices, which have grown wider, thanks to the rising global prices. At present, NOC has debts totalling Rs.10 billion, out of which it will have to pay Rs.4 billion to IOC alone. In the past, both India and Nepal followed a similar oil price policy, adjusting the prices in years. India has switched over to an auto-adjusting price mechanism; Nepal has not. Hence, the oil crisis in Nepal.

To ensure uninterrupted supply and make costs and revenues equal, the government will have to opt for auto-adjustment. Nepal depends fully on import for its petroleum needs. So, its annual oil bills are heavy. The interim government, as it consists of the various political parities with varying economic and political priorities, has been unable to arrive at a consensus on dealing with the domestic oil crisis. NOC should get from its sales at least what it pays for its imports. That said, however, there is need to take into account the concerns of the poor consumers. Kerosene, a commodity of daily necessity for the poor, should receive some subsidy, while the selling prices of petrol and cooking gas may well be fixed even at a little higher level than cost. But, oddly enough, cooking gas, used mainly by urban consumers, mostly in the capital and for commercial purposes, enjoys much more subsidy (30%) than kerosene (5%). Besides, since the petro-products include a large component of tax, a little cut in the taxes, particularly on kerosene, could also be considered. However, to ensure that the changeover to auto-mechanism is not abrupt and drastic, a transition period, say, of one year may be worthwhile.