Oil subsidy: Export parity pricing to kick off from FY14

The finance ministry has calculated the oil subsidy for 2013-14 on the basis of estimating 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-R12,000 crore for the full year on diesel subsidy .

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 oil companies,? said a government official privy to the development. 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. In addition to the deregulation of diesel prices, the ministry hinges on adoption of the export-parity pricing model also for the proposed reduction in subsidy amount (oil prices are estimated to average at $110/barrel in 2013-14, roughly the same level as this year). Sources, however, added that the Budget estimate for 2013-14 also factors in the possibility that the government might not be able to let the oil companies hike the 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 products ? 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.

Under-recoveries are now estimated on the basis of a trade-parity price based on an 4:1 ratio of landed cost of imports and export price. 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.

While unveiling the Budget, finance ministry has kept the revised estimates at R96,800 crore, out of which R93,500 crore is towards the compensation for oil marketing companies and balance for subsidy for North-Eastern states.

The government so far this year had released R55,000 crore towards subsidy to oil marketing companies. With the latest sanction of R30,000 crore in February 7, it has met about 44% of the R1,24,854 crore revenue the three PSU firms together lost on selling auto and cooking fuel below cost during the April-December period this fiscal.

In the second supplementary, the finance ministry is likely to release R38,500 crore, sources said.

The ministry while calculating the subsidy for the next fiscal has factored in calibrated diesel hike in at least seven months and the capping of the subsidised LPG cylinders per household at nine, besides the savings from targetted delivery of LPG subsidy using the Aadhar card at least in parts of the country. Internally, the ministry has kept the subsidy on diesel at R6/litre for next fiscal. The current under-recovery on diesel is close to R11.26 per litre. With many state elections scheduled in the last half of 2013-14, hiking diesel prices will become politically difficult.

The government has made a budget estimate for next fiscal on the basis of time-series analysis keeping exchange rate at R55/dollar and crude oil at $110/barrel. At present, OMCs are also suffering under-recovery on sale of kerosene by R33.43/litre and domestic cooking gas by R439/cylinder.