Parikh panel against export parity pricing for petro products

Written by Pranav Nambiar | New Delhi | Updated: Oct 2 2013, 09:07am hrs
Despite the finance ministry's insistence on a shift to 100% export parity pricing to determine the under-recoveries of oil marketing companies (OMCs), the Kirit Parikh committee on pricing of diesel and cooking fuel is unlikely to endorse this model. A better option would be to move in a phased manner to a market-determined mechanism for pricing of petroleum products, the committee feels.

It 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 might not yield any big savings to warrant such a policy change.

According to sources, the Parikh committee, which finalised its views at a meeting here last week, came around the view that the existing pricing mechanism could be replaced by the market-linked mechanism in a phased manner. It may also propose an immediate hike of R4 per litre for diesel, followed by monthly hikes of R1 till the under-recovery on the fuel is eliminated.

At present, the under-recovery on diesel is over R10 a litre. In line with the ongoing deregulation of diesel, which accounted for 60% of the under-recoveries at around R1 lakh crore last year, the price of the fuel has been revised by 50 paise a month on nine occasions since January 2013. The under-recovery level, however, is just R2 per litre less than the level in January owing to the weak rupee and high crude oil prices.

In the case of LPG and kerosene, the panel is likely to recommend a phased move to market prices in the next two-three years through periodic increase in prices.

This could be in the form of Rs 2 per litre hikes in kerosene and Rs 100-per-cylinder hike in LPG to begin with.

The final report of the panel is expected to be released later this month.

Under the proposed export parity system, the refinery-gate price of products due to OMCs would have to 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. 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. Therefore, 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. That is why the finance ministry is pitching for it. The Parikh committee, however, noted that the savings on this account would not be more than 10% (of under-recoveries), given the current prices. The export parity mechanism, for example, would have taken off Rs 17,000 crore from the 2012-13 fuel subsidy bill of Rs 1,61,029 crore.

The petroleum ministry has consistently opposed the export parity model, keen as it is to protect the financial health of OMCs. However, oil retailers including IOC, HPCL and BPCL, which sell fuel at discounted rates, claim that adopting export parity will render many of their refineries obsolete. Some of these refineries are as old as 100 years and may find it difficult to absorb further losses.

Though the petroleum minister had initially appointed the panel under former Planning Commission member Kirit Parikh to recommend a suitable pricing mechanism for diesel and cooking fuel, finance minister P Chidambaram changed its terms of reference to suggest a model based only on export parity pricing.

Slippery situation

* Kirit Parikh committee unlikely to endorse export parity pricing for calculating under-recoveries

* Recommends sticking to existing pricing mechanism and moving in a phased manner to a market-linked mechanism

* Diesel under-recoveries are calculated using trade price parity, and kerosene and LPG using import price parity

* The finance ministry has pushed for export price parity to cut the under-recoveries on sale of discounted fuels

* Oil ministry has opposed export parity to protect the OMCs, which will receive lower compensation under the mechanism