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Thursday, October 31, 2013

Finance Minester won't buy Parikh's oil maths

The finance ministry has rejected the Kirit Parikh panel report on the pricing of diesel, kerosene and LPG to rationalise fuel subsidy outgo. The panel submitted its report to the government on Wednesday.

If the government eventually accepts the 108-page report, it will end up paying Rs 13,500 crore more to refiners like IndianOil, Reliance Industries (RIL) and Essar Oil, the finance ministry said in a dissent note to the panel’s report.

As such the ministry is not opposed to phased decontrol and market-linked retail pricing of diesel, kerosene and cooking gas.

The panel has suggested an immediate increase of Rs 5 a litre in diesel price to offset the losses suffered by state-run oil marketing companies, which have to sell the fuel below cost. It has recommended that the subsidy on diesel be capped at Rs 6 a litre.

The panel has suggested raising kerosene price by Rs 4 a litre and capping the supply of subsidised LPG to six cylinders a year to each household. It has suggested raising subsidised LPG price by Rs 250 a cylinder.

While the finance ministry wants the subsidy to be benchmarked to the export parity price (EPP) of diesel, the panel wants the import parity price (IPP) to be used to decide compensation to oil refiners.

There is a difference of 3 per cent between IPP and EPP – the reason why the finance ministry is opposed to IPP.

Saurab Garg, joint secretary in the finance ministry and a member on the panel, has pointed to “overcompensation,” a euphemism for additional subsidy payment, to oil marketing companies and private refiners.

“There is no reason that for domestic sales (diesel and kerosene), the realisation (price) should be higher than what is being realised due to export of diesel by the same manufacturers,” the finance ministry note has said.

The additional subsidy payment in case the domestic prices are benchmarked to IPP on 80 billion litres of diesel and 9.9 billion litres of kerosene sold annually will be Rs 13,500 crore.

Garg argued that due to assured sale of both diesel and kerosene in the domestic market, the refiners would have to lower retail prices. The ministry has also pointed out that even if a minor difference of Rs 108 per kilolitre of kerosene is taken into consideration, a conservative estimate puts the extra subsidy payable to these companies at Rs 1,000 crore.

In this context, the ministry has pointed out that RIL exported diesel at $126.78 per barrel while Essar Oil was doing it at $125.60.

Kirit Parikh himself and S K Barua, former director of IIM Ahmedabad who is also on the panel, have countered the ministry arguments. In a rejoinder to the finance ministry’s dissent note, Parikh cited the Rangarajan committee recommendation to provide “protection to domestic refineries.

The ministry also wants upstream oil companies like ONGC and OIL to share a larger burden of subsidy. But the Parikh panel wants to limit it to 40 per cent of the crude price if it is below $80 a barrel.

The panel wants state-run upstream oil companies to bear an additional 0.25 per cent for every $1 per barrel when the crude price ranges between $ 80 and $120. If the price moves beyond $120, the oil companies could bear 50 per cent of the subsidy burden, the panel has suggested.

On the other hand, the ministry wants 40 per cent of the under-recoveries on a crude price up to $80 a barrel to be on government account, this going up to 60 per cent at $120 per barrel. It insists that the government cannot sustain the high subsidy outgo, especially in a grim economic situation.

The ministry has also joined issue with the panel on the method used for the calculation of the subsidy burden on public sector upstream companies. The panel has said, “…there is no single or unique formula which can be said to represent the correct method for fixing domestic refinery gate prices in India.

Therefore, instead of replacing the existing well-established IPP/TPP pricing mechanism by some other arbitrary and ad hoc mechanism, the panel recommends that the best course would be to free the market from price controls at the earliest.

The panel’s recommendations are not binding and need cabinet approval to be implemented. After submitting the report, Parikh said, “Now, the ball is in government’s court.” Even if the government accepts the report, it is unlikely to implement it immediately or anytime soon in view of the looming elections.

For the current year the total subsidy on diesel, kerosene and LPG was estimated in April at Rs 80,000 crore. But this will have risen to Rs 130,000 crore by the time the financial year ends, primarily because the dollar has become harder against the rupee.

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