FinMin may press for export parity pricing to lower subsidy outgo

The Kirit Parikh Committee’s fuel-pricing report has been submitted at a time when the country is gearing up for next year’s general elections.

This reality itself is enough for oil companies to believe that none of the recommendations will be implemented till a new Government is in place.

“We have seen this in the case of petrol during State elections a couple of years ago. It was already deregulated but we could not tinker with its price,” says an oil sector official.

This time around, it is a bigger canvas with the national elections and inflation already hurting households. The Parikh panel has suggested that diesel prices immediately be hiked by Rs 5 a litre and cooking gas by Rs 250 a cylinder.

“Can you imagine anything like this happening? The report means well but there is no way on earth the Government will even think of going ahead with such a steep price hike now,” says the official.

Creeping benefit

From the oil industry’s point of view, it is good enough if marketing companies are allowed to continue with the present system of diesel hikes of 50 paise each month, prevalent for nearly a year now. The loss on diesel works out to a little over Rs 10/litre and this marginal increase every month will wipe out the deficit over the next two years. This is, of course, assuming that there is no spike in world diesel prices.

Diesel accounts for two-thirds of the subsidy losses of Rs 150,000 crore annually, with cooking gas and kerosene taking up the balance.

“Diesel has been a constant bother for us right from the crude price crisis of 2008. It is not just cars but other user industries like power, construction equipment and shipping that make the most of the subsidy,” says an oil company executive.

The most welcome aspect of the Parikh report, at least for marketing companies, is continuation of the import parity pricing for controlled fuels.

The Finance Ministry is, however, keen that this be replaced by export parity pricing as it will bring down the subsidy outgo by nearly Rs 18,000 crore. This is because costs relating to transport and other duties will be knocked off while calculating the subsidy.

Oil marketing companies are not sure if the Finance Ministry will eventually have its way. The ministry has already objected to the Parikh Committee’s views on the subject, which means the trio — IOC, HPCL and BPCL — could be in for higher losses on subsidised fuels.

Reducing the burden

The Finance Ministry wants to reduce its own payout to these companies in the compensation formula, where ONGC and Oil India also do their bit.

Yet, export parity pricing could have serious implications for inland refineries, such as BPCL’s refinery in Madhya Pradesh and HPCL’s in Punjab, as they would have to absorb freight costs.

“Logically, we could opt for exports instead, but this will seriously affect supplies in the domestic market. Can we even afford a situation like this,” asks a top marketing official.

Nobody knows what the Finance Ministry will decide, but from the oil sector’s point of view, the show will just have to go on.

(This article was published on November 4, 2013)
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