The Hindu Business Line : Pricing problems

THE RECOMMENDATIONS OF the Rangarajan Committee on Taxation and Pricing of Petroleum Products are worthy, save for one important aspect — the pricing policy for petrol and diesel. The Committee's recommendation on this issue is a major disappointment for those who were expecting a more liberal approach. The system of trade parity pricing could prove cumbersome to administer and is a bureaucratic solution to a weighty problem. Importantly, it does not take away any of the complexities that are inherent in the pricing mechanism for petroleum products. If anything, it only makes it more complex. A more appropriate approach would have been to recommend moving to a free market system, without recourse to import or export parity, and leave the field free to the competing players to offer consumers the best possible price.

The Committee has also argued that, being a cyclical industry, the oil refining sector deserves to be protected. The argument does not pass muster because there are other cyclical industries that do not have the same level of effective protection and yet are doing well for themselves. Though the Committee has recommended cutting this effective protection by half — to 20 per cent — by reducing Customs duties on petrol and diesel to 7.5 per cent, the fact is that even at this level it is far too excessive. That said, there are other positive recommendations that could help take the sector forward. For instance, the recommendation to restrict subsidy on kerosene to families below the poverty line and to phase out the subsidy on cooking gas completely, in stages. Of course, the challenge in the former would be to find a workable way of reaching the subsidy to deserving sections of society.

The suggestion to do away with ad valorem duties on petrol and diesel and shift to a specific duty offers nothing in the near term. The Committee has recommended a fixed duty of Rs 14.75 on petrol and Rs 5 on diesel by applying the current ad valorem duty on latest prices and adding the existing specific duty to it. This does not provide any comfort to consumers because these duties are on the high side. The Committee could have recommended a lower level of specific duty on the two products — one that is balanced, as opposed to the present regime where the government takes away as much as 55 per cent of the retail price of petrol in various levies.

The recommendation that subsidy from the upstream companies should be collected by increasing the cess paid by them now is a clever move to ensure that the entire amount of cess collected is used for the petroleum industry. The issue of cess of Rs 5,000 crore collected from the upstream oil companies not being used for the development of the petroleum industry has been a sore point with the latter. The suggestion to stop issuing oil bonds and provide for subsidy in the Budget is a sensible one too. It remains to be seen how many of these recommendations are accepted and implemented. As the Committee has warned, if no action is taken, the financial position of the oil companies will deteriorate further "jeopardising the country's energy security".