Trade parity to stay for LPG under-recovery

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SummaryThe government is set to retain trade-parity pricing for calculating the under-recovery of oil marketing companies on the sale of domestic cooking gas even as it shifts to export-parity pricing for diesel and kerosene.

Diesel, kerosene to be calculated on export-parity

The government is set to retain trade-parity pricing for calculating the under-recovery of oil marketing companies (OMCs) on the sale of domestic cooking gas even as it shifts to export-parity pricing for diesel and kerosene.

“The finance ministry is of the view that the under-recovery on the sale of diesel and kerosene be calculated on export-parity but in case of LPG, trade-parity pricing will continue to be used,” an official said, requesting anonymity.

Trade-parity price is the weighted average of import-parity and export-parity in the ratio of 80:20. The finance ministry has calculated the oil subsidy for FY14 on the basis of under-recoveries through “100% export-parity pricing” of petroleum products. According to sources, in comparison to the existing “trade-parity pricing”, the export-parity model will help the government save R10,000-12,000 crore for the full year on diesel subsidy alone.

Export-parity-pricing mechanism is being implemented from 2013-14 as part of the larger exercise to make petroleum pricing more transparent and reduce the “under-recovery” claims of OMCs.

The annual cap on supply of subsidised domestic LPG refills has been raised to nine from six, and OMCs have been given freedom to raise diesel price from time to time.

The finance ministry has estimated oil subsidy for next fiscal at R65,000 crore against the R96,880 crore (revised estimate) for the current fiscal. Sources, however, added that the Budget estimate for FY14 also factors in the possibility that the government might not be able to let OMCs hike diesel prices every month by 45-50 paise as envisaged.

Diesel is the biggest element in oil subsidy accounting for 60% of the total subsidy bill. Under the 100% export-parity pricing, the refinery-gate price of 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.

While the export and import prices don’t 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.

OMCs are also suffering under-recovery on sale of diesel by Rs8.19/litre, kerosene by Rs33.43/litre and domestic cooking gas by Rs439/cylinder. The projected under-recovery is around Rs1,63,000 crores during the end current fiscal.

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