The proposed method will allow more savings for the government on the subsidy front because the export parity price is bound to be lower than the trade parity price which is sum total of landed cost of imports and export price in the 4:1 ratio.
This is because while export and import prices don’t vary too much, landed cost of imports includes tariff, domestic taxes and transportation charges, unlike export price which doesn’t include import tariffs and transportation charges.
The plan could pinch oil companies, though. Downstream oil PSUs must find alternative ways to boost revenue (improving refinery margins, for instance).
The OMCs’ concerns have already been expressed through their apex body Petroleum Federation of India, which sought to highlight that Indian refiners, in general, incur higher energy charges and pay more freight compared with their West Asian counterparts It is not clear if the upstream companies whose share of the subsidy burden has risen from around 30% in 2009-10 to 40% and higher in the three subsequent years will be shared the benefit of the new plan.
On subsidy payments, Citi Research recently said the government might defer at least 50% of its payment share of R1 lakh crore in 2012-13 to next year. It actually did slightly better and to be precise, the oil subsidy payment by the Centre this fiscal will be R60,080 crore. This factors in the comfort letter issued by the finance ministry last week to oil companies, promising an additional cash subsidy of R25,000 crore. (Oil firms had posted profits in the second quarter after reporting heavy losses in the first quarter, thanks to release of R30,000 crore earlier this year. Of the budgeted fuel subsidy outlay of R43,580 crore, R38,500 crore was used to pay the 2011-12 dues).
Of course, the proposed monthly hikes in retail diesel prices (till the under-recoveries are nullified in some to years) and the deregulation of bulk diesel prices that accounts for a fifth of the fuel’s consumption would bring significant savings on the subsidy bill – 0.5% of GDP in 2013-14 according to Citi Research. Put differently, the