The Hindu Business Line : No clear picture on oil subsidy, pricing

Global crude at unprecedented highs led the Indian oil PSUs to go into regression as far as bottom lines were concerned. Since the time when the uncovered subsidy was to the tune of almost Rs 7 per litre of petrol/ diesel, there has been a reversal of fortunes with the uncovered subsidy now wiped out in the case of petrol and only marginal in the case of diesel.

The pundits feel the worst is over, ruling out the likelihood of crude hitting the ceiling once again in the near future. Still, the fact remains that the issue of oil subsidy needs to be addressed; oil bonds, at best can only be a short-term solution.

The proposed oil bonds of about Rs 15,000 crore will be against an uncovered LPG and kerosene subsidy of Rs 20,000 crore this fiscal and about another Rs 20,000 crore for petrol and diesel.

Industry players agree that the Government needs to go in for a structural adjustment of the pricing policy as has been and is being done by Governments the world over.

Going by the revenue neutral changes in the excise duty structure on petrol and diesel last fiscal, one cannot expect any spectacular changes here in 2006-07 either.

VAT basket: But how long can the Government allow petro products to be kept out of the VAT basket, asks an analyst tracking the sector.

"It seems unlikely that the Government will be brave enough to make any meaningful restructuring of the tax structure on petro products any time soon. Perhaps a beginning can be made by the Centre asking the States to arrive at a narrower sales tax band than the present one that swings wildly between 5 per cent and 35 per cent. The next step would be to bring it under VAT. This will lead to pressure on the Centre to make some reciprocal adjustments in the excise duty regime. No commodity can continue to have 60-70 per cent of its shelf price come by way of tax load," said the analyst.

The cautiously optimistic industry sentiment is reflected in the number of new players getting into retail. Reliance Industries is set to open retail outlet No: 1,000 on December 28; Essar Oil has over a hundred outlets; Shell and MRPL may not have more than a couple of outlets each but they are waiting for some signal.

Variable pricing: Floating prices of petro products cannot be that far away and nobody wants to miss out when it happens. The difference between the four companies is reflected in their variable risk taking abilities.

"It may take a year, two, or more. But it has to come. Companies such as ours with existing retail network across the country will need to put in systems that will give variable pricing solutions. Thus, it could be morning vs. evening price or suburban vs. city price, where even realty rates could get factored in. It could also come to a situation where any retail outlet could sell more than one brand. Just like any other product for sale, petrol and diesel will get treated as commodities," said a senior officer with oil marketing PSU.

It will be a surprise if India travels at one go the full distance and ushers in all facets of differential pricing as one gets to enjoy now in the US, Europe, Japan and many other countries.

Come 2006, it may not be quite realistic to expect either low prices for petrol and diesel during weekends or to strike a bargain by filling petrol from the wrong side of the highway.