Column: Piecemeal petro-pricing reforms

Written by Gokul Chaudhri | Updated: Nov 6 2013, 10:51am hrs
The expert group chaired by Kirit Parikh has submitted its recommendations to the government on pricing methodology for the Indian downstream industry.

The term of reference of the expert group was spelt out, quite narrowly, toa) review the current pricing methodology of petroleum products and recommend alternate mechanism benchmarked to Export Price Parity (EPP); b) suggest a formula to compensate oil manufacturing companies (OMCs) for under-recoveries; and c) propose measures for operating efficiencies. Before finalising their report, the expert group considered representations made by leading refiners, PSUs and private, and concerned stakeholders/industry bodies.

The expert groups multi-pronged recommendations underscore the need for complete decontrol of petroleum products prices, i.e., prices of diesel, PDS kerosene and LPG, as the only viable option in the long-term. The current recommendations offer only a limited interim solution, at best a bandage to the alarming impact of the petroleum subsidies that are debilitating the oil and gas sector, both upstream and downstream. The three important recommendations include immediate upward step up in prices for the controlled petroleum products to partially bridge the gap, provide a specific cap on the subsidy that will be borne by the petroleum sector, and continuity of the prevailing pricing formulae on the assumption that minor amends would not fix the subsidy problem which requires eventual decontrol of prices.

The immediate impact that the recommendations seek are increase of diesel price (by R5/l) and subsidised LPG price (by R250 per cylinder) to address increased subsidy burden on these products which have risen since May 2013 on the back of volatile crude price and a depreciating rupee (vis--vis global currencies); it has also made a proposal to cap cash subsidies on diesel to R6/litre.

The journey of petroleum sector reforms dates back to the late-1990s with the initial roadmap provided for time-bound dismantling of the administrated price mechanism which had been established in the mid-1970s. This was popularly termed The R Committee and was headed by Vijay Kelkar. The delay in the implementation of the reforms, and in some cases, partial implementation, has caused significant distortions, and led to several expert groups to try and address the growing problems.

The committee on pricing and taxation of petroleum products led by C Rangrajan in 2006 correctly incorporated the need for taxation reforms as essential to deal with the migration of the sector to market-based pricingthese have only been partially followed, and today the build-up of diesel prices reflect nearly R10.92 per litre from custom duty, excise duties and VAT, which nearly coincides with the under-recoveries of R10.51 per litre. This raises the question of what taxation is sought to be imposed on the product. A rather convoluted cycle of over R1.61 lakh crores!

The work of the experts continued with the formation of the high-powered committee on financial position of OMCs headed by B K Chaturvedi in 2008 and the expert group on a viable and sustainable system of pricing of petroleum products headed by Parikh in 2010. The crux of the recommendations continued as beforepursue market-determined pricing.

The message from the experts is loud and clear, albeit the question of political willingness to deal with the situation is yet to get a response. The final resolution of the growing subsidy bill will now land on the lap of the next government, and that too, for urgent resolution. Meanwhile, the industry can only hope for the interim measures, now identified, to inch towards implementation. The much desired investment and growth in both upstream and downstream sector can witness green shoots only with the sun setting on the petroleum pricing control, hopefully before the twentieth anniversary of the Kelkar committee report from 1997.

The author is partner and leader, direct tax, BMR Advisors.

Views are personal