Pricing of Petroleum Products in India

Summary:

The pricing of Petroleum Products in India was changed from Administered Pricing Mechanism (APM) to Free Market in 2002, but the occasional governmental intervention for political reasons is leading to distorted pricing for major products. Moreover, the Free Market Pricing is so designed that it is unfair and unjust to the consumers. Further, the Duty and Tax structure appears to be ad hoc which violates the basic fundamentals of free and fair market prices.

(1)  Prices of indigenously produced petroleum products are based on Import parity. What is the justification of padding up the prices with ocean freight, custom duty etc. when no such cost is being incurred by the seller?

(2)  Under- recoveries and subsidies on Diesel, PDS Kerosene and LPG are being paid by the government to Oil Marketing Companies (OMCs) to enable them to sell these products below the market price. At the same time Excise Duty, Educational Cess and Sales Tax are being levied resulting in increase in prices. During 2012-13, Rs. 161029 crores was paid to OMCs as under recoveries. In addition, the Government of India also subsidized Kerosene and LPG to the extent of Rs.2730 crores. At the same time, the Government of India recovered Rs.22,916 Crores as Excise duty on Diesel and PDS Kerosene only during 2012-13.

In short, rationalization of petroleum product prices and duty structure can benefit the consumers with lower prices; reduce under-recoveries and subsidies to the bare minimum.

Petroleum Product Prices in India:

Administered Pricing Mechanism (APM) was dismantled in April 2002 but prices of major petroleum products continued to be controlled and dictated by the Government directly or indirectly for various political and social reasons.  In June, 2010, Government of India decided to free Diesel prices but it is still not completely free.

Pricing of major petroleum products under the Free market are based on the recommendations of the C.Rangarajan Committee, Feb., 2006.This was further reviewed and modified by the Expert Group headed by Mr.Kirit Parikh, Former Member Planning commission in October, 2013

The C. Rangarajan Committee recommended Ex-storage Point Prices (ESPP) for indigenously produced products on Import Parity (IPP) and the Kirit Parikh committee justified the same basis on the considerations that it was recommended by the Rangarajan Committee. The dissenting note of Dr. Saurabh Garg, Jt. Secretary, Plan Finance II, Ministry of Finance was brushed aside by Mr.Kirit Parikh and Prof.Barua with completely unacceptable arguments. In the Rejoinder to the dissenting Note of Dr.Garg, Dr.Kirit Parikh stated:

(a) Domestic refineries need protection by allowing them to price the products on IPP including custom duty, whether it is actually paid or not. Protection is justified as a few Eastern refineries are having negative returns. It is not understandable whether the scope of the committee was to recommend proper pricing mechanism or look into the economics of individual refineries. Refinery economics issue should be left to the concerned organization and administrative Ministry. If policy makers start distorting pricing mechanism for extraneous considerations, then what is the idea of having an expert group to decide free market pricing mechanism?

(b) Dr. Kirit Parikh has justified payment of CST to give incentive to private refiners as otherwise they would export HSD. Private refiners will export products only when actual realization from export will be higher than the realization from home market. This could happen at times when international product market is tight resulting in higher realization from exports. The same refiners will scramble to push maximum products in the home market when international prices are weak. The pricing structure need to be fair so that the refiners get fair price i.e the average price that they will realize through exports during the year and not on month to month basis. During the year pricing mechanism based on EPP should be fair to both seller and consumers.  They need to supply products required within the country at export parity price and export surplus products, if any. These refiners have set up excess capacities, keeping in view future demand as it is always advantageous to sell products in the home market. If they do not fall in line, Government should consider imposing Export Tax.

© Mr. Kirit Parikh has further tried to justify IPP on the premise that 80% benefit will accrue to Public Sector refineries. This appears to be a very hollow argument. The issue is not who is getting the benefit of higher prices but whether the pricing is fair to all stakeholders.

(d) The logic provided by Prof. Barua in his rejoinder makes one believe that the decision was taken first to fix prices of indigenously produced products on IPP and then the same are being justified as minor differences. It is difficult to understand why such illogical arguments are being given to justify a lop-sided pricing mechanism. Why can’t we go with the right pricing mechanism rather than justifying the biased pricing mechanism? Is it important to give incentive in price even after giving so many incentives to these private refiners  at the time of conceiving the project- land at very low price, tax holiday etc. It appears that members of Expert group and policy makers are too scared of private refiners and are finding excuses to appease them. The fear that the private refiners, if not given additional incentives, may export the products which will result in higher cost of import is absolutely unfounded as already explained in (b) above. If Refiners still resort to arm twisting, the government needs to act firmly rather than surrendering.

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 The Indian Petroleum Industry has always been a milking cow for the Central as well as State Governments. Subsidies on HSD, PDS Kerosene (Public distribution Kerosene) and LPG are being given to keep the prices low in the interest of Aam Aadmi (common man).  Refiners and Marketing companies are compensated for the under-recoveries for keeping the prices lower than the market.

Some of the main issues in pricing are outlined below:

(a)   After in-depth studies of the Pricing Mechanism of Petroleum Products in India, one wonders if our policy makers are clear about what are the aims and objectives of the policies they formulate. (i) Do they want higher domestic prices to benefit oil companies or lower prices to benefit the consumers or fair price for all? (ii) Do they want to artificially jack up the market prices so that a bogey of subsidies and under-recovery is created to fish around with the prices to benefit some, at the cost of tax payers?

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(b)  Salient features and recommendations for revised pricing policy

b (i) Crude Oil:

India imports nearly 85% of its crude oil requirements, which attracts Rs.50 per MT as NCCD (National Calamity Contingent Duty). This duty impacts prices of all petroleum products including Diesel, Kerosene and LPG resulting in higher under-recoveries and subsidies?

Recommendations: Make Custom Duty (NCCD) =NIL.

Recover equivalent amount from Non subsidized products

b (ii) Petroleum Products:

Prices of major petroleum products-Motor Spirit (Petrol), Kerosene and Naphtha is based on Import parity (IPP), including custom duty, freight, insurance, port dues etc. Price of diesel is based on 80% IPP and 20% export Parity (EPP) on the basis of the Kirit Parikh report.

Comments:

(1)  Prices of all products produced indigenously should be on EPP and for imported products on IPP. 

(2)  It is difficult to understand the rationale of import duty on MS and Diesel. In 2012-13, we imported only 0.147 million MT MS and 0.626million MT HSD but exported 16.657 Million MT MS and 22.464 million MT HSD.

Major Products:

HSD (Diesel):

During 2012-13, Oil companies were compensated to the extent of

Rs.92, 061 crores for under-recoveries on diesel. Prices of diesel are now being increased on a monthly basis by approx. Rs.0.50/litre per month since January, 2013 to reduce under-recoveries. However, due to falling rupee with respect to US $, under recoveries on Diesel may remain around Rs.100, 000 crores in 2013-14 with current pricing policies.

 Currently, Ex Storage point Price (ESPP) of HSD is based on 80%IPP and 20% EPP. This ratio has been justified by the Kirit Parikh report on the consideration that 20% HSD is being exported. Export of 20% HSD has no relevance to pricing.HSD is being exported as it is surplus.

Recommendations:

Diesel price should be based on EPP price.

  This will reduce the ESPP of BS-III grade HSD by more than Rs.2 per liter and reduce under-recoveries by almost Rs.20,000 crores

 PDS Kerosene:

During 2012-13, oil companies were compensated to the extent of Rs.29410 crores for under-recoveries on PDS kerosene. In addition the Government gave subsidies to the extent of Rs.741 crores on 7.5 million MT PDS kerosene

Recommendations:

Current Ex storage Point Price (ESPP) is based on IPP, which does not make any sense as there was no import of Kerosene in 2012-13. Its price should be based on EPP.

This will reduce the ESPP SKO by more than Rs.2 per liter and reduce under-recoveries by almost Rs.1500 crores

 LPG:

During 2012-13, oil companies were compensated to the extent of Rs.39558 crores for under-recoveries on LPG. In addition, the Government gave subsidies to the extent of Rs.1989 crores on 13.6 milion MT LPG for domestic use.

Recommendations:

During 2012-13, 6.3 million MT was imported i.e. about 40% of the total requirement. Retail price of LPG should be fixed on the basis of IPP. However, ESPP for LPG produced domestically should be based on EPP and for Imported LPG on IPP. Difference in the ESPP of indigenous and imported LPG should be adjusted against under-recoveries payable to OMC for LPG. On the basis of 1/10/2013 prices considered in the Kirit Parikh report for LPG, under recoveries for LPG will reduce by  Rs 2500.crores in 2013-14, if  subsidized LPG remains at the same level as in 2012-13.

 Motor Spirit/Naphtha:

Pricing basis of all other major products, Motor Spirit, Naphtha, ATF etc are also based on IPP though there is hardly any import.  ESPP of all these products should be changed to EPP which will result in reduction in price by almost Rs.3000 per MT. If ESPP is fixed on EPP basis and retail price is kept at current level, MS and Naphtha could yield more than Rs.10000 crores to the government as excise duty, which can be utilized for reducing under-recoveries/subsidies on other products.

Some Other Important Issues:

(1)  HSD attracts Excise Duty/Educational cess of Rs.3563.8/KL .While price of HSD is being kept below the market rates and under-recoveries are being paid to oil companies, price is being escalated through excise duties. It may be desirable to abolish excise duty from HSD to reduce under-recoveries.

(2)  Most States have imposed hefty VAT on all petroleum products, including HSD, PDS Kerosene and LPG. It is suggested that VAT on these products should be abolished or restricted to bare minimum say less than 5% so that basic price of these products could be increased without adversely affecting the burden on the consumer. Loss in revenue to the states due to lower VAT on these products should be made good by plugging leakages in tax collection on other commodities.

(3)  It is well known that due to significant difference in price between PDS kerosene and Diesel/MS, substantial quantities of Kerosene is being diverted to HSD/MS. This misuse need to be stopped so that (1) benefit of subsidized kerosene is made available to those who need it and (2) Under-recoveries /subsidies on PDS kerosene is reduced. It is suggested that :

(a) Price of Kerosene should be increased to bridge the gap between Kerosene and HSD/MS prices.

(b) Direct credit of subsidy, similar to the scheme of LPG, should be considered to curb mis-use of PDS kerosene.

Conclusion:

(1)  Custom Duty (NCDD) should be made Nil on crude oil.

(2)  ESPP should be fixed on EPP for indigenously produced products and on IPP for imported products.

(3)   For Products which are being imported as well as produced indigenously such as LPG, ESPP and hence retail price should be based on IPP. However, for the quantities produced indigenously, differential of IPP and EPP should be recovered from Oil Marketing Companies to adjust against Under-recoveries/Subsidies.

(4)  Excise duty and VAT on HSD, PDS Kerosene and LPG should be made Zero or bare minimum.