Alarmed by the R1.7-lakh-crore oil subsidy demand for this fiscal, the finance ministry has decided to revisit a suggestion made by expert committees in the past: Work out the subsidy entitlement of oil marketing companies (OMCs) according to 100% export-parity pricing of petroleum products. Under this system, the refinery-gate price of products petrol, diesel, cooking gas and kerosene due to OMCs will be arrived at as an average of export (FOB) prices of these product in select markets. The difference between the price realised by OMCs they sell below cost in the subsidy regime and the export price determined will be the under-recoveries, compensated through subsidy.
This would mean big savings for the fiscally stressed government on the subsidy front. The OMCs, on their part, would have to look for alternative means to boost revenues including improving refinery margins. Currently, under-recoveries are estimated on the basis of a trade-parity price based on an 4:1 ratio of landed cost of imports and export price. While the export and import prices dont vary too much, the import-parity price (landed cost) which includes tariffs, duties akin to domestic products and transportation charges works out to be higher than the export-parity price, which is exclusive of import tariff (basic customs duty) and transportation (port and shipping) charges. So a shift to 100% export-parity pricing would mean a reduction in under-recoveries as approved by the finance ministry and correspondingly lower subsidy payouts.
The 2006 Rangarajan committee, which proposed trade parity pricing contended import-parity pricing amounted to allowing OMCs to enjoy a rent akin to ocean freight and associated costs while export-parity price would put domestic refineries, especially PSUs, at a disadvantage.
Former Planning Commission member Kirit Parikh, who authored the Integrated Energy Policy in 2006 and advocated the deregulation of fuel prices in June 2011, said: The current mechanism is not really trade-parity... It could be the finance ministry is going to shift from the current formula to fully (100%) export-parity pricing. This would reduce under-recoveries of OMCs by R1-2 per litre on account of diesel and kerosene.
When contacted, Prime Ministers economic adviser C Rangarajan said, We had made the recommendations on the situations prevailing that time. I dont want to comment on the finance ministrys current thinking. PK Goyal, director (finance), Indian Oil Corporation, said, We have no clue on (what the finance ministry is considering). It is premature for me to comment.
Oil minister Veerappa Moily last week said his ministry was yet to take a view on the Kelkar committee proposal to raise diesel prices in a calibrated manner. Many economists had favoured the formula of a monthly increase in diesel prices, saying this would ultimately help curb inflation.
Since nearly 80% of the oil consumed/processed in the country is imported, global crude prices (which remained at a somewhat elevated level of $110 a barrel even though lower than last years) and a weak rupee are contributing to the spike in the oil subsidy bill.
A stagnation in domestic oil production is aggravating the scenario.
Among other things, the Kelkar panel, which laid down a new three-year fiscal consolidation road map, had also recommended removal of LPG subsidies in three phases by 2014-15 and reduction of kerosene subsidy to a third of current levels.