Unshackled, fuel prices zoom

Post-APM, petrol and diesel prices surge 42% and 58%, respectively.

The prices of petrol and diesel have risen by 42 per cent and 58 per cent, respectively, since the country moved out of the administered price mechanism (APM) for petroleum products three years ago.

The increase came as oil companies saw an almost 40 per cent increase in the price of crude oil purchased by them during the period.

In March 2002, crude oil purchased by India was around $22.8 a barrel. It peaked to $39.9 in October 2004 and settled at $34.8 in December 2004, showing a 52 per cent increase in dollar terms though in rupee terms, it stood at around 40 per cent. The daily average of the Indian basket of crude touched $51.6 on Friday morning.

The figures suggest that oil marketing companies (OMCs) have increased their retail prices in a manner so that they were in keeping with the level of hike in input costs.

However, for import parity, the companies were, for most part of the period, left seeking government approval every time they wanted to increase the retail price.

Technically, the APM was dismantled three years ago -- April 1, 2002 -- when the oil pool account was dissolved and the companies were told that they could charge the import parity price for petrol and diesel.

But in reality, as admitted by Petroleum Minister Mani Shankar Aiyar recently, APM for petroleum products was never dismantled.

OMCs were on paper allowed to increase the retail price every fortnight after the abolition of APM.

"During the time of the earlier government, we had to convince only the petroleum minister for a hike, but now, the buck does not stop at the minister since he insists on taking the issue to the Cabinet each time we approach him," said an oil company executive.

The advisory group headed by Chief Economic Advisor Ashok Lahiri identified two hurdles in the transition from APM to market-based pricing, which was envisaged to come into effect from April 1, 2002, but it was still to happen. These are the pricing regime for LPG and kerosene and the lack of competition.

"In a competitive market, with adequate refinery capacities generating exportable surpluses, domestic prices should have ruled somewhere between import and export parity prices," said the group's report.

Some in the industry prefer the oil pool mechanism as it existed during APM days to the current situation since under-recoveries on account of selling LPG and kerosene at lower than cost were passed on to the oil pool account against which PSUs were issued bonds. But now the OMCs are left with under-recoveries which are to be borne by their balancesheets.

In the current year, public sector OMCs are expected to incur under-recoveries of Rs 20,000 crore on account of petrol, diesel, kerosene and LPG sales.

Take the case of Indian Oil Corporation, the biggest OMC in the country. It showed a net under-recovery of Rs 4997.93 crore during April-December 2004 even after Oil and Natural Gas Corporation, Gail India and Oil India shared one-third of the total under-recoveries.

The company partly offset the under-recoveries through a Rs 7.36 crore over-recovery in petrol in October 2004. Later in January, it over-recovered close to Rs 546.5 crore in diesel and petrol.

The company estimates in January 2005 put the net under-recovery at Rs 7,566.80 crore for 2004-05, but after changes in the duty structure and the recent spurt in international crude oil prices, the figure was expected to rise.

As far as the duty structure is concerned, in most petroleum-importing countries, commodity taxes on petroleum provide more revenue than those on any other product, including tobacco and alcohol.

In the four metropolitan cities in India, taxes as a proportion of the final price account for 57.2 per cent in the case of motor spirit, 37.4 per cent for HSD, 23.3 per cent for kerosene and 22.2 per cent for LPG prior to the exise revision announced by Finance Minister P Chidambaram.

The finance minister announced Rs 6 as special additional excise and Rs 2 as road cess for petrol replacing, the current 23 per cent excise Rs 1.50 in cess.

In the case of diesel, the change will mean an additional burden of Rs 1.75 as excise not only remains at 8 per cent but there is also an additional Rs 1.25 excise levy besides a 0.50 paise increase in cess.

This is expected to further burden the oil companies since the duty burden increases without any rise in retail price.

Besides, the protection being enjoyed by the companies in the form of import parity also stands reduced owing to the cut in Customs duty.