With oil prices scaling higher and retail pump prices remaining unchanged, the question that conjures up is who will bear the subsidy burden? Should it be the government, upstream firms or the refining & marketing companies (R&M)?

The administered pricing mechanism (APM) was dismantled in 2002, however, the government continued to control prices of sensitive petroleum products, not allowing a complete pass through of prices into the system. As a result, under recoveries incurred by oil marketing companies (OMCs) rose five-fold (from Rs 20,000 crore in 2004-05 to over Rs 1 lakh crore in 2008-09).

Currently, with the Indian basket of crude oil hovering around $75 a barrel, oil companies are incurring a shortfall on selling sensitive petroleum products. According to industry estimates, under recovery on account of non-realisation of market determined prices on sensitive petroleum products is Rs 5 per litre for petrol, Rs 4 per litre for diesel, Rs 299 per cylinder of domestic LPG and Rs 17 per litre for kerosene (PDS).

In order to free oil pricing, in the recent past, the government had constituted two expert groups—vis the Rangarajan Committee and the BK Chaturvedi Committee.

Key recommendations of the Rangarajan Committee were as follows:

* Shift to trade parity pricing (implemented);

* Flexibility to oil companies to fix retail prices on arms length (not implemented)

* Rationalisation of customs and excise duty on petrol and diesel (implemented)

* Rationalisation of LPG prices (not implemented)

* Subsidy provisioning without recourse to oil bonds (not implemented)

* Discontinue upstream assistance (not implemented)

Key recommendations of the B K Chaturvedi Committee were as follows:

* Revamping of pricing structure on FOB basis

* Revocation of entry and octroi tax or allowing to recover from sale (not implemented);

* A Special Oil Tax at 100 % on revenues in excess of $ 75 per barrel on domestic producers on pre-NELP leases and at 40% on private/JV block that predate NELP (not implemented)

* Dual pricing mechanism with gradual revision of prices over a period of time and special levies in notified cities (not implemented)

* Reduction of import duty on Petrol and Diesel to nil ((not implemented)

* Reduction in entitlement of subsidized LPG cylinders and its gradual phasing out (not implemented)

* Rationalisation of customs and excise duty on petrol and diesel (implemented)

* Rationalisation of LPG prices (not implemented)

The Economic Survey 2009 again reiterated the long standing need for reforms. The survey recommended several policy reforms for the sector; it unequivocally reiterated decontrolling of petrol and diesel prices; developing a policy response system and financial buffer for use when diesel prices rise above the oil equivalent price of $80 per barrel; and reform of petroleum subsidies to reduce leakages. It recommended setting up an expert group to advice on a viable and sustainable pricing mechanism for petroleum products.

The petroleum ministry constituted an expert group committee led by Kirit Parikh to advice on viable and sustainable system of pricing of sensitive petroleum products. The task force was formed to look into: examination of the current taxation structure on the sensitive petro products, and make recommendations to rationalise the taxes, examination of the financial health of the public sector OMCs and to recommend ways of compensating them for their under-recoveries in case they are not permitted to charge market prices on government?s intervention, to protect consumers; and any other matter, which the Expert Group may consider necessary.

The report of the committee was presented to the minister on Wednesday. It recommended that the current fuel price policy was not sustainable going forward and has sought ONGC?s opinion on revenue sharing.

The recommendations proposed in the report suggest a piece meal approach on deregulating pricing. While it was anticipated this committee too will reiterate a complete deregulation in pricing; it chose to take an approach that would rather be implementable than being a mere rhetoric.

The report suggests deregulating only petrol prices at this point and maintaining more or less a status quo of administered pricing on other sensitive petroleum products. It is not clear as to how much of deregulation would be achieved or the under recoveries would be brought down by linking diesel prices to per capita income. In 2008-09, 95% of the under recoveries were on account of three petroleum products vis diesel (50%), Kerosene (PDS) (27%) and LPG (Domestic) (17%). By deregulating only petrol prices, only a portion of under recoveries would be scaled down.

Subsidy on kerosene (PDS) granted through fiscal budget by the government is currently 82 paise per litre only while under recoveries on selling Kerosene (PDS) is over Rs 14-17 per litre. As this subsidy it is targeted to the BPL families, maintaining a status quo on the same was expected. By suggesting a partial revision of Rs 6 per litre on Kerosene (PDS) will still lead to under recoveries to the tune of Rs 8-11 per litre, thereby threatening the financial health of OMCs as well as the government finances.

The Kirit Parikh report suggests seeking ONGC’s opinion on revenue sharing and it is not clear to what extent will ONGC be willing to share the under recoveries. There is also no clarity on how does the government plan to finance the under recoveries although earlier it has be resorting to oil bonds which have been largely illiquid for the OMCs.

While it has been reported that the report will be placed before the government or the Cabinet in a week’s time, given the sensitivity of this sector and the upcoming Union Budget, it will be interesting to see how the above recommendations would be given effect to by the ministry of finance and/or the ministry of petroleum & natural gas.

(The views are personal.)