Oil may be pegged to WPI

Prices of petroleum products are likely to be linked to the Wholesale Price Index and changed every quarter. The finance ministry is in favour of revising the specific component of excise duty on petrol and diesel as it wants to ensuring buoyancy in government revenue, while protecting consumers' interest.

The government is planning to bring about a new pricing policy to replace the fortnightly revision that has been the practice since the administered pricing mechanism (APM) was dismantled, said an official.

Petroleum Minister Mani Shankar Aiyar has on several occasions indicated his intention of cutting short the post-APM freedom that oil marketing companies enjoyed in fixing retail prices.

In line with the recommendations of an advisory committee headed by Chief Economic Adviser Ashok Lahiri, Finance Minister P Chidambaram has proposed a combination of specific and ad-valorem excise structure for petrol and diesel.

He imposed an excise duty amounting to 8 per cent with a specific component of Rs 5 on petrol replacing the 23 per cent excise duty and Rs 6 special additional excise duty. The ad-valorem component of excise duty on diesel stays at 8 per cent while the specific component is Rs 1.25.

The composition of excise duties in terms of ad valorem and specific duties for light diesel oil (LDO) is not same as that of high-speed diesel, though the products are similar. Officials, however, said the ad-valorem duty for LDO will be adjusted every year to equalise the post-tax prices of both the products.

The Budget has increased the specific duty component on LDO by Re 1, while the ad-valorem component continues to be at 16 per cent.

The finance ministry's argument to bring about flexibility in the specific component is that it remains unchanged since it is in rupees on a unit, irrespective of the price that a product commands.

"Ad valorem tax structure, on the other hand, insulates the government revenues against erosion in real terms due to inflation, though it may add to an additional price increase when international prices rise," said an official.

The central government is also working on a mechanism to harmonise the impact of fluctuations in international petroleum prices across the country through coordination with the state governments.