The oil ministry has finally agreed to adopt the export parity price model for calculating oil marketing companies? (OMCs) under-recoveries, in a move expected to reduce the subsidy burden on the government.
On its part, the finance ministry, which pitched for a shift from the current trade parity regime, agreed to pay a record R1 lakh crore towards diesel and cooking fuel subsidy in 2012-13. The ministry is yet to pay another R45,000 crore of that amount, while upstream companies will contribute about R60,000 crore.
At last fiscal’s oil prices and rupee level, a shift to export-parity model would entail subsidy savings to the tune of R15-18,000 crore.
The future course of prices would however be taken after a report from the Kirit Parekh Committee has been submitted, which will take about two-three months to submit, the former Planning Commission member told FE. ?We will have to take into consideration the concerns of the OMCs, as the market is not in perfect competition,? Parekh said.
The in-principle agreement between the oil and finance ministries was reached following a meeting between PM Manmohan Singh, finance minister P Chidambaram, and petroleum minister Veerappa Moily on Wednesday.
Currently, the OMCs follow the trade-parity pricing model while selling products like petrol, diesel, cooking gas and kerosene. Under the current trade-parity price, pricing of petroleum products takes a 4:1 ratio of landed cost of imports and export price.
On the other hand, under the100% export-parity pricing of petroleum products, 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.
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 charges.
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.
Though the finance ministry has been asking oil companies to move towards export parity for sometime now, the oil ministry was reluctant to make the transition on the grounds that the OMCs would make losses.
?This move will reduce prices for consumers by 80 paise to a rupee while for the OMCs it will lead to lower realisation. But finally, looking at the subsidy burden and the deficit is our biggest priority right now,? a finance ministry official told FE.
It was decided that the current practice of trade parity pricing would be followed for the subsidy dole. ?Today, both finance minister P Chidambaram and I attended the meeting called by the PM. A few concerns were raised by both of us. Regarding export parity pricing, the Parikh committee has been asked to come up with suggestions in the next two months. Based on that, the cabinet will take a call. However, the finance ministry has agreed to pay compensation for OMCs for the second half of this financial year,? Moily said.
The shift to export parity pricing was strongly espoused by North Block even though oil ministry officials had cautioned of the disadvantage to domestic refiners in terms of margins.