The high fiscal deficit and the reluctance of the finance ministry to compensate oil companies by way of oil bonds made it necessary for the government to go in for a major reforms in the pricing of the petroleum products.
In 2008 when the international crude oil prices had touched $140 per barrel, there was no mechanism to automatically hike the prices and the political pressure meant that the government couldn’t hike the prices. This pushed the under-recoveries in 2008-09 to over Rs 1 lakh crore. It led to a feeling within the government to find a permanent solution to this recurring problem of under-recoveries.
And when Mr Pranab Mukherjee became the finance minister, he made it clear that he doesn’t want to compensate the oil companies through oil bonds but only in cash. This is because he wanted to bring transparency to the whole system.
During the review of the petroleum sector by PM Manmohan Singh in January it was decided that the government should go for some reforms in the pricing of the petroleum products. The report submitted by the Kirit Parikh committee in February recommended freeing of petrol and diesel prices and a hike of Rs 100 in LPG and Rs 6 per litre in kerosene. The finance minister was also keen to push the fiscal deficit which was at a high of 6.8 per cent in 2009-10, a result stimulus package given at the time of financial crisis, to deficit of 5.5 per cent for 2010-11.