The policy-decision, which forms part of the ``line of action'' of the government drawn up by the Prime Minister's Office (PMO), will imply a quick rollback of subsidies on liquefied petroleum gas (LPG) and kerosene and a systematic cutback in import duties. Both the subsidy rollback and the hacking of duties are behind the schedule drawn up for dismantling the APM for oil in September 1997.

Union petroleum minister Ram Naik has so far hedged a direct response to whether LPG and kerosene prices would be raised, in keeping with the four-year programme for dismantling the APM. The PMO's directive to the Union finance ministry is to ``speed up'' the dismantling of the APM. This suggests that market-driven prices for administered petroleum products may be here even before the April 2002 deadline.

The directive is part of a ``line of action'' plancomprising 17 items, of which deregulating the petroleum products industry is only one. Currently, the Union government is a little behind the schedule devised by the Experts Technical Group (Nirmal Singh Committee) of the petroleum ministry and subsequently approved by the Cabinet.

On September 1, 1997, the Union government decided to pass on freight, taxes and other levies on controlled petroleum products to consumers. Freight and ``under-recoveries'' on petrol, diesel, LPG, kerosene and jet fuel are scheduled to be passed on to consumers by 33 per cent each year -- over a three-year period.

While taxes and levies have been passed on to consumers, the oil pool account continues to bear the burden of freight for most petroleum products. The pool account, for instance, still bears 13 per cent of the 33 per cent of freight on diesel that the consumer should have paid for this year.

On November 20, 1997 the Union government decided to reduce the subsidy on kerosene and LPG in stages, to 33 per cent of theselling price of kerosene and 15 per cent of the selling price of LPG by 2001-2002. The four-year programme provides for increasing the ex-storage point price of kerosene by 30 per cent every year, but this has not happened.

Much of the 11 million tonnes of kerosene used in the country is still available at a retail price of Rs 2.50 a litre. The subsidy on the ex-storage point price of Rs 2 a litre is Rs 5.55 a litre, or 277.5 per cent. A considerable amount of kerosene is also available in the free market at market rates. To speed up the APM dismantling process the Union government will have to implement the 30 per cent increase in kerosene prices pending for the last year and another 30 per cent hike that was due this year.

The APM dismantling schedule also calls for a rollback in the subsidy on LPG by 33 per cent each year beginning 1998-99. The January hike in LPG prices by Rs 24 per cylinder took care of last year's schedule.

The Union government still has to implement the 33 per cent reduction inLPG subsidy that was due during 1999-2000. In the meanwhile, the 118 per cent increase in LPG prices in the world market has jacked up the subsidy component of cooking gas to Rs 121.80 per cylinder from Rs 70 per cylinder in September 1997.

Cooking gas cylinders marketed by national oil companies now come with 128 per cent subsidy. To even keep to the APM dismantling schedule, the Union government will have to make cooking gas dearer by Rs 60 per cylinder.

The phased programme of reforms provides for reducing the import duty on crude oil (now 20 per cent) to less than five per cent by 2001-02. Customs duties on petroleum products like diesel, kerosene and aviation turbine fuel (ATF) should come down to 15 per cent (from 30 per cent now) and the duty on LPG should be as low as 10 per cent.

The full implications of the PMO directive will only be apparent in the months ahead. At the moment it is only clear that the stronger, bolder incarnation of the BJP-led coalition means business when they speakreforms.

INSIGHT:

Right move
Speeding up the dismantling process of the administered pricing mechanism is good news for the oil and refining sector as it will drastically bring down the rising oil pool account deficit. The deficit is likely to go up as consumption of LPG will increase with the government clearing its usage in the auto sector (though industrial LPG is meant for this purpose, the number of vehicles currently use domestic LPG). Another issue is cross-subsidisation: though the government has talked about rolling back the subsidy on kerosene and LPG there is no talk of cutting down the prices of petrol and ATF which are priced high precisely to cross-subsidise kerosene and LPG. Quite possibly, when their prices are cut, the government will neutralise the effect with an appropriate hike in taxation. This may leave it with scope to continue with some form of direct subsidy for kerosene and LPG even after APM is dismantled.

-- Shishir Asthana