Many twists, and now a turn

After Independence, for over 25 years, the prices of petroleum products were based on import parity. Then came the administered pricing mechanism (APM), essentially cost-plus, for another 25-plus years. And now, for nearly a decade, we have an era of ad-hocism. If the past is any indication, this may continue for many years.

Ad-hocism started no sooner than dismantling the APM in the fag end of 2001-02. While prices of petrol and diesel were deregulated from April 1, 2002 and oil marketing companies started revising them on a fortnightly basis, domestic LPG and PDS kerosene carried specific subsidies to be phased out over three years in an equated manner. As per the scheme announced then, for subsidies to stay specific per cylinder of LPG or per litre of kerosene, the changes in international prices, ocean freight etc. were to be passed on to the consumers every month.

However, in practice, the government did not permit public sector oil marketing companies to pass on any increase in prices of domestic LPG and PDS kerosene. Though, it did reduce specific subsidy by one-third after one year and by two-thirds after two years of announcing the scheme. These remained unchanged ever since. With international prices of petrol and diesel rising, the government introduced informal control of prices of these products from the later part of 2003.

As under-recoveries increased for OMCs, the government took ad-hoc decisions like issuing oil bonds, sharing of burden by upstream national oil companies, and permitting non-commensurate increases in prices. When the situation became difficult, it appointed a committee on 'Pricing and Taxation of Petroleum Products,' under C Rangarajan. The committee's report in February, 2006 urged implementation of sets of recommendations as packages. The government selectively implemented those recommendations, which neither affected its revenues nor led to a rise in consumer prices. With ballooning under-recoveries, the government, in June 2008, again constituted a "high powered committee on financial position of oil firms", under BK Chaturvedi, which submitted its report in August, 2008. None of its recommendations was implemented. In August 2009, the government again appointed an expert group on "A viable and sustainable system of pricing of petroleum products", under Kirit S Parikh. The group submitted its report in Feb 2010.

It was only in June 2010, after vacillating for over four years, that the government announced deregulation of petrol prices along with price hikes in diesel, PDS kerosene and domestic LPG. The government also announced its intention to deregulate prices of diesel, from which it later retracted. With mounting pressure of increasing under-recoveries, the Centre, in June 2011, took the bold decision of reducing custom duties on petrol and diesel from 7.5% to 2.5%. In addition, a reduction in excise duty and an increase in retail selling price for diesel were announced. This had a salutary effect in bringing down under-recoveries on sales of diesel, which accounts for about 45% of petroleum products sale. The relief was, however, short-lived with international product prices going north.

In 2011-12, the total under-recoveries were placed at about Rs. 1,38,000 crore, a record high. With pressure mounting from oil companies to either once again declare petrol as a regulated product or deregulate it in the real sense, the government finally permitted them to increase petrol prices on May 24, the steepest hike so far. This has triggered widespread dissatisfaction amongst petrol users.

Small price changes periodically would have caused lesser dissatisfaction.

The myriad ill-effects of under-pricing of petroleum products, and growing subsidies, include not only inefficient usage, substitution of low value products, adulteration, and a mounting fiscal deficit but also deteriorating financial health of oil companies. There is no dearth of people within the government who can provide innovative solutions to the problem. It is for the government to take the bull by the horns and not allow the situation to drift.

Some short-term measures could be denial of subsidised LPG to tax payers, removal of bogus ration cards, subsidy ceiling on diesel, and rationalisation of duties/VAT/sales tax on petrol & diesel. Long-term measures could be expansion of piped gas supply, solar lighting (to replace kerosene use) and direct provision of subsidy.

Tags: petroleum pricing, pricing mechanism, domestic LPG, PDS kerosene, oil subsidies, VAT, sales tax