The Finance Ministry is right in questioning the rationale for allowing refineries to be paid the import parity price (IPP) while computing under-recoveries on sale of controlled petroleum products. The IPP is the price at the border of goods that are imported and would also include Customs duty and other associated charges. But India today imports just a little over a tenth of its total petro-product requirement. In 2012-13, the country did not import a single tonne of kerosene and actually exported 22.5 million tonnes or nearly a quarter of its diesel production. If something is not being imported, how can anyone — leave alone local producers of the same commodity — be compensated for Customs duty and other ‘notionally’ incurred costs? These aren’t small amounts, given that diesel now attracts an import duty of 2.58 per cent. Together with insurance, banking and other charges, the extra compensation to domestic refiners from IPP works out to 3 per cent or more.
It is on these grounds that the Finance Ministry — whose representative attached a dissent note to the report of the Kirit Parikh-headed expert group — has favoured an export parity price (EPP) regime for determining compensation to domestic oil companies against the sale of products at below market rates. EPP makes sense because a refiner should have the option of either selling his product locally or exporting it. The realisation from exports represents the opportunity cost or revenue foregone from having to sell the product in the domestic market. By that logic, the refiner should be entitled to just the EPP — no more, no less. The Parikh panel’s proposal to continue with the IPP mechanism for fixing refinery-gate prices, to the extent of 80 per cent for diesel and 100 per cent for kerosene and LPG cylinders, is therefore illogical. There is no justification for paying oil companies an extra Rs 2.39-a-litre for diesel, the difference between its current IPP and EPP.
One cannot fault the other recommendations made by the panel though. These include raising diesel prices by Rs 5 a litre immediately and paying oil marketing companies a subsidy not exceeding Rs 6 to cover any balance under-recoveries. Capping the latter at Rs 6 a litre means that any corresponding increases in global crude prices or fall in the rupee beyond this level would be automatically passed on to consumers. The panel has similarly suggested an immediate hike of Rs 4 a litre for kerosene and Rs 250 for LPG as well as reduced annual cylinder entitlements from nine to six per family. But any action on these ‘immediate’ recommendations is unlikely in an election season that extends for another six months or so. It would have been more realistic to aim for smaller monthly price increases of say Rs 2 a litre for diesel, which is still higher than the present 40-50 paise hikes.