Oil ministry wants market-linked prices

The government may link petrol and diesel prices to market prices in 2010-11 and introduce a graded system of subsidy-sharing, with the petroleum ministry taking the view that the Kirit Parikh committee report be made the basis for next year's petroleum subsidy mechanism.

"For 2010-11 and beyond, the Kirit Parikh report will be the benchmark. The report is being studied.These decisions are politically sensitive issues and have to be sustained over a period of time," Petroleum Secretary S Sundareshan told Business Standard. "It is impossible to insulate the Indian consumer against the movement in international oil prices. Ultimately, the consumer has to pay the price of the product he is consuming. The government could have a deliberate policy to subsidise the weaker section for kerosene and LPG," he added.

In the Budget on February 28, Finance Minister Pranab Mukherjee had said the petroleum ministry had to take a decision on the Kirit Parikh report.Sundareshan did not, however, specify when the report would come before the Cabinet.

The Kirit Parikh committee, which submitted its report last month, had recommended market-determined pricing for petrol and diesel and linking the price of domestic LPG and kerosene distributed through the Public Distribution System (PDS) to the increase in per capita GDP and agriculture GDP, respectively. The committee had also suggested a partial increase of Rs 6 a litre on kerosene and Rs 100 on every LPG cylinder. It also proposed a 20 per cent reduction in kerosene allocations for the PDS.

Raising auto and fuel prices, however, is a political decision, especially for products like kerosene, which is considered a poor man's fuel, and diesel. The government has already considered two reports (by Rangarajan and B K Chaturvedi) on the issue without taking a decision.

Auto and cooking fuels are sold below cost by the three state-owned oil companies, Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum. These are partly compensated by the government and by state-owned upstream oil companies like Oil and Natural Gas Corporation (ONGC) and GAIL.

The need to link fuel prices market rates is becoming increasingly urgent because of the rising subsidy bills and growing losses of the oil marketing companies (OMCs). For the current year, OMCs are estimated to incur losses of Rs 47,960 crore. After the discounts provided by upstream companies and Rs 12,000 crore provided by the government, the OMCs are still left with losses of over Rs 19,000 crore.

However, with the crude oil price expected to rise steadily as a result of faster economic growth--it is already up to $78 a barrel from $46 this time last year --the government is finding it difficult to continue this subsidy in the light of the burgeoning fiscal deficit of 6.7 per cent of GDP in 2009-10, which the finance minister wants to bring down to 5.5 per cent in 2010-11.

On February 26, the government had raised prices by Rs 2.71 and Rs 2.55 a litre on petrol and diesel respectively after Mukherjee raised excise by Rs 1 a litre on the two products and restored the five per cent customs duty on crude oil. 

This, however, left an under-recovery from these two products, that was proposed to be shared by the government and the upstream companies. Currently, ONGC, OIL and GAIL bear the under-recoveries of oil marketing companies (OMCs) on the sale of petrol and diesel while the under-recoveries on kerosene and LPG are supposed to be compensated by the government. ONGC, GAIL and OIL are asked to share the revenue loss on cooking and auto fuels sales since a spurt in international crude oil prices increases their revenue.

 "Whether the report gets implemented in totality or in a diluted form, it is for the policy makers to decide but it will be incorrect to keep it on the backburner," said R S Sharma, chairman and managing director, ONGC."The recommendations must essentially be implemented since it is the only way to ensure a stable future for the downstream and upstream oil companies. If it is not done, the industry will die a slow death," he added.