The government is likely to alter the way diesel and cooking fuels are priced to reduce its subsidy burden, which appears to be spiralling out of hand due to the falling rupee.

Since the last fiscal, the Finance Ministry has pushed for refiners to be paid the equivalent of rates they would have realised if diesel, kerosene and LPG were exported. A departure from the import parity price (import price plus duties and transportation) mechanism would have shaved Rs 17,618 crore from last fiscal’s Rs 161,029 crore subsidy bill.

But Oil Minister M Veerappa Moily thwarted the move by seeking the Prime Minister’s intervention and promising to get the pricing issue looked at by an expert committee.

A panel under former Planning Commission member Kirit S Parikh was constituted to suggest a suitable pricing mechanism. But Finance Minister P Chidambaram has got the panel’s terms of reference altered by mandating it to suggest a model based only on export parity pricing.

“Finance Minister wanted a change in the reference...(which) we have adopted,” Moily said here.

Originally, the Oil Ministry had proposed that the committee be asked “to revisit the current pricing methodology of import party/trade parity for diesel, PDS kerosene and subsidised domestic LPG and suggest a suitable pricing mechanism for sale of these products.”

The panel, after Chidambaram’s intervention, has now been asked “to revisit the current pricing methodology of petroleum products, and suggest a pricing mechanism benchmarked to export parity pricing, which is also related to the actual export realisation of the petroleum products exported from India by private refiners,” Moily said.

The change essentially means the Parikh Committee can only suggest how to price diesel, kerosene and LPG on export parity rates and unless the report is rejected, it will become the benchmark for subsidy calculations.

Currently, diesel is priced at trade parity, of which 80 per cent is import price and 20 per cent export rate. Kerosene and LPG are priced at import parity.

The Finance Ministry wanted export parity pricing for diesel and kerosene in 2012-13 and wanted LPG to be priced through a 60-40 mix of export and import parity rates.

Officials said a shift to export parity pricing would have cut the subsidy on diesel by Rs 14,372 crore to Rs 77,689 crore in 2012-13. Another Rs 2,245 crore would have been saved on LPG and Rs 1,001 crore on kerosene.

The saving would come from the removal of import duty and notional transportation cost in the import parity price.

For the current fiscal, the total subsidy for selling diesel, kerosene at LPG at rates below cost was put at Rs 80,000 crore in April but has now climbed to Rs 125,000 crore because the falling rupee has made imports costlier.

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