Parikh hands govt fuel bomb on election eve

Written by fe Bureau | New Delhi | Updated: Oct 31 2013, 04:08am hrs
An expert group headed by former Planning Commission member Kirit Parikh has recommended immediate hikes in prices of fuels sold by oil marketing companies below cost diesel by R5/litre, kerosene by R4/litre and the subsidised LPG price by R250/cylinder. It has also charted a rather short-term (not exceeding two years) road map for elimination of the subsidies on diesel and LPG while the kerosene subsidy amount could be reduced substantially by completing the roll-out of direct subsidy transfer to BPL families within two years. PDS allocation of kerosene, which carries subsidy, would anyway come down with the spread of rural electrification and increased use of LPG and PNG for cooking, the panel noted.

The immediate steps recommended, according to the panel, entail savings in subsidies (borne by the government and upstream oil firms) of over R92,000 crore over a year, subject to certain levels of crude price and the rupee. It has seen that with the measures it proposed, the governments share of oil subsidy burden could be reduced drastically to R29,130 crore in FY14 and nil in FY15 (provided the crude price averages $100/barrel and the rupee rules at 60 to the dollar).

Coming as it does ahead of the state and Parliament elections, even the panel head, however, did not sound optimistic about expeditious implementation of the proposals. We recognise it may not be possible right now to increase prices by the same quantum as suggested in the report, Parikh said.

The Parikh committee recommended continuation of the trade parity pricing (TPP) pricing to calculate under-recoveries on sale of subsidised fuels, notwithstanding the finance ministry arguing for a shift to export-parity pricing. The ministry has submitted a note of dissent to the committees report, where it claimed adoption of EPP would help save the exchequer Rs 13,500 crore annually.

Parikh reckons that export-parity model as opposed to the extant trade-parity price based on 4:1 ratio of the landed cost of imports and the export price in case of diesel and 100% import parity in case of LPG and kerosene will not yield any big savings to warrant such a policy change.

In January, the government allowed fuel retailers to raise the price of subsidised diesel by Rs 50 a litre every month and asked bulk buyers to pay market rates. Although price hikes were implemented in several months, the depreciation of the rupee ensured that the under-recovery on diesel, the fuel on which the subsidy element is the highest, hasnt come down much.

The Parikh panel recommended that diesel price be raised by Rs 5/litre with immediate effect and the balance under-recovery should be made up through a subsidy of Rs 6/litre to PSU OMCs. The subsidy on diesel capped at Rs 6/ litre should be reduced gradually and finally removed through regular monthly downward revisions in the cap on subsidy and corresponding increase in the price of diesel over the next one year.

The committee also favoured a reduction of the quota of subsidised LPG to 6 cylinders per household in a year from 9 at present. It recommended a Rs 4 per litre increase in kerosene and Rs 250 per cylinder hike in LPG rates. It added that kerosene eventually be priced at full market price and the benefit of the subsidy to the deserving consumers i.e. BPL families, is given through direct cash transfer mechanism.

Oil firms currently sell diesel at a discount of Rs 10.52 a litre, kerosene at Rs 38.32 and LPG at Rs 532.86 per cylinder.

The revenue loss suffered by the OMCs has to be met through a combination of government cash subsidy and contribution from upstream firms like ONGC and OIL.

The committee recommended that ONGC-OIL share of subsidy burden be retained at last years level of $56/bbl for FY14 but suggested a new formula for FY15 onwards.

Oil minister Veerappa Moily told reporters that they will consult the finance ministry before taking a final decision over pricing. I do not want to pass a value judgment on the recommendations. The report has been presented to me just now. There is a process involved (in accepting and implementing such reports). We will decide on it in consultation with the finance ministry, he said.

If implemented, the recommendation will reduce fuel subsidy by Rs 30,250 crore during the remainder of the current fiscal from a projected Rs 138,435 crore.

The committee also recommended a new formula for the upstream companies share ($56/barrel) of subsidies. At crude prices of over $80/bbl, the subsidy share should stand at 40% of price, at crude prices between $80 120/bbl the share would stand at 40%+ 0.25% for each $1/barrel increase beyond $80/barrel, and for crude prices above $120/barrel it would be 50% of crude price.

The committee said GAILs share of subsidy burden should not exceed the gross profit on sale of LPG (after allowing a reasonable profit amount to be retained by the firm). It may be noted that the petroleum ministry had favoured exempting GAIL from the obligation of sharing the subsidy burden with the other two upstream firms, considering that the company is being forced to replace KG-D6 gas with more expensive LNG, which has resulted in its LPG and liquid hydrocarbon business recording losses in the first quarter. GAIL contends its not in the upstream exploration business and therefore does not get any upside from the rise in crude oil or natural gas price.

The expert group also recommended that OMCs be given the freedom to procure crude oil and petroleum products through a mix of long-term contracts and spot purchases from all available sources. This can be accomplished without compromising transparency and accountability by working out mechanisms in consultation with the CVC.


* Raise diesel price by R5/litre immediately. Make up the balance under-recovery through R6/litre subsidy to OMCs

* Gradually reduce this R6/litre cap on diesel subsidy through regular monthly price hikes over a year

* Raise price of kerosene by R4/litre and subsidised LPG by R250/cylinder; cut subsidised LPG cylinders to 6 from 9

* Retain ONGC-OIL share of subsidy burden at $56/barrel for 2013-14, new formula for 2014-15 onwards

* Continue trade parity pricing to determine OMC under-recoveries

* Difference between trade parity pricing and export parity pricing was R13,500 crore in FY12

* Moving to export parity will mean 5 out of 15 PSU refineries will have negative GRMs;

in overall terms, GRMs will fall by 30-40%