The Kirit Parikh committee has recommended market-determined pricing for petrol and diesel. It has also recommended linking the price of domestic LPG and kerosene distributed through the Public Distribution System (PDS) to the increase in per capita GDP for urban population and agriculture GDP, respectively.
The committee has also made a case for an additional excise duty of Rs 80,000 on diesel cars. At the current levels, the price recommendations translate into an increase of Rs 3 a litre on petrol and Rs 3 to Rs 4 on diesel.
Based on a 66 per cent increase in agriculture GDP since March 2002, when kerosene prices were last revised to Rs 9 a litre, the committee has worked out an increase of Rs 6 a litre.
In the case of LPG, the recommended increase is at least Rs 100, which would take the total price to approximately Rs 381. Based on an 84 per cent (rounded off to 85) increase in GDP for urban population since 2004-05, however, the price should be Rs 485 a cylinder.
| FUEL FOR THOUGHT (What the Parikh committee recommended) |
| * Market-linked prices: Rs 3/litre increase for petrol and diesel, Rs 6 a litre for kerosene and Rs 100/LPG cylinder |
| * Additional excise duty of Rs 80,000 on diesel cars |
| * Companies should be free to fix retail prices |
| * Periodic reduction in kerosene allocation via public distribution system (PDS), based on the level of electrification in villages plus periodic price revisions |
| * Kerosene distribution via PDS should eventually move to a smart card system through the Unique Identification number |
On the excise duty on diesel cars, the report said: “The higher excise duty on petrol compared to diesel encourages use of diesel cars. While greater fuel efficiency of a diesel vehicle should not be penalised, a way needs to be found to collect the same level of tax that petrol car users pay from those who use a diesel vehicle for passenger transport. An additional excise duty on a diesel vehicle corresponding to the differential tax on the petrol should be levied.”
Appointed last year to suggest a sustainable and viable pricing policy for petroleum products, the committee submitted its report to Petroleum Minister Murli Deora. The ministry is expected to process the report and place it before the Cabinet in a week.
Though Parikh did not provide an estimate of the impact of the present level of increase on inflation, he said, “The impact would be the same, whether the increase is funded through the fiscal deficit (by not increasing retail price and providing a subsidy) or through a direct price increase.”
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The recommendation to increase auto and cooking fuel prices comes at a time when inflation rose sharply to 7.31 per cent in December and Prime Minister Manmohan Singh is expected to meet chief ministers to discuss food prices shortly.
“In a situation in which the global price increase of crude is not passed on, inflation gets artificially suppressed, leading to various distortions. If the domestic price is increased, the fear of latent inflation will be addressed. It is the right step even though it will push up inflation. The consumer will not conserve unless he is made to bear the burden of the increase,” said D K Joshi, principal economist, Crisil.
To bring down the under-recoveries that oil marketing companies suffer in selling LPG and kerosene below cost, the committee has suggested periodic reductions in PDS kerosene allocations based on the level of electrification in villages, besides a periodic price increase.
The eventual goal, however, is to move to a smart card system of direct subsidy through use of unique identification numbers.
It also recommended that upstream companies, Oil and Natural Gas Corporation and Oil India, be asked to share a portion of their incremental revenue from nominated blocks. While accepting ONGC’s recommendations on a graded increase in burden-sharing based on the increase in crude prices, the committee rejected the idea of a windfall tax. ONGC’s formula is such that if international prices go up from $70 to $140 a barrel, the amount of subsidy from central government on LPG and kerosene will remain stable at Rs 20,000 crore, Parikh said.
The recommendations have taken on board the financial health of the upstream and downstream companies, which is being affected by the ad-hoc policy. It also addresses the issue of demand-side management by making the consumers feel the pinch of high prices. It should reduce the subsidy burden of ONGC,” said R S Sharma, chairman and managing director, ONGC.
In what could benefit private players like Reliance Industries Ltd (RIL) and Essar Oil, the committee has also recommended that each company should decide its own retail price and compete in the market for petrol and diesel.
The recommendation is a sharp departure from those made by previous such expert groups and existing government policy that allowed government-owned oil marketing companies (OMCs) to move away from the cost-plus pricing to a system that ensures they earn a marketing margin even while calculating under-recoveries.
“The ministry should decide suitable amendments to the existing notifications and orders prescribing import parity price and trade parity price so that individual company will have full freedom to decide its own basis, norm or formula to derive prices of petroleum products and compete with others in the market,” said the report.
S Thangapandian, CEO (Marketing), Essar Oil reacted to the proposal by stating that the company’s idle assets can be reactivated and employment opportunities created. “It will help us to be in the business of fuel retailing on a regular basis and ensure healthy competition by bringing a level-playing field. Consumers will have a choice between various companies in the public and private sector,” he said.
In the case of domestic LPG and kerosene sold through the PDS, since the under-recoveries are expected to continue even after the price revision, the committee has favoured continuing import parity pricing so long as the country remained a net importer of kerosene and LPG. Import parity allows a company to calculate price on the basis of what it costs to import a particular fuel. It also includes customs duty which is otherwise not paid by a company if it sells from domestic production.