The finance ministry’s proposal to switch from the present trade-parity pricing to export-parity pricing could reduce the bill for under-recoveries by a little over a tenth
How much will an export parity price-based formula reduce the under-recoveries of oil marketing companies?
The under-recoveries of oil companies may come down by almost a tenth to R18,650 crore through a switch to export-parity prices from the present trade-parity system, assuming the present rate of compensation and consumption of the respective fuels. The bulk of the reduction in under-recoveries will be on diesel, at about R14,180 crore, while it will be R3,645 crore for LPG and R827 crore for kerosene. With the government paying 50% of the total under-recoveries, it will mean a saving of close to R10,000 crore in fuel subsidies during 2012-13.
What is the current system to calculate under-recoveries?
Under-recoveries are the difference between the total desired price and the price charged to dealers or the depot price. The total desired price is arrived at by adding the refinery transfer price, premium recovered for BS-IV grade (for diesel), inland freight and delivery charges, marketing costs and marketing margins of OMCs. Now, the refinery transfer price is equated in terms of trade-parity price?a weighted average of import and export-parity prices. Consumers have to pay a higher price than the total desired price of oil companies as VAT; specific excise duty and dealers commission is added to the fuel bill.
What is trade-parity pricing?
Some years ago, the government used to calculate under-recoveries on the basis of import-parity prices. After a report by a committee headed by C Rangarajan, the government moved to trade-parity price of 80:20?import price with a weighting of 80%, and export-parity price with a weighting of 20%.
The trade-parity price is always higher than the export-parity price due to a higher weighting of imports (India has to import four-fifth of the fuel it consumes). The import-parity price includes the global price of oil (FOB), trade premium for gas oil with 0.5% sulphur, derived quality premium for BS-III grade, ocean freight to Indian ports and import charges comprising insurance, ocean loss, LC charges and port dues. Diesel attracts a customs duty at 2.5% plus a 3% education cess while kerosene and LPG are exempted. In contrast, the export-parity price is calculated as the cost of importing the fuel minus the ocean freight.
How will the shift to export-parity price-based under-recoveries affect PSUs?
Oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum will stand to lose as the export-parity price will show a lower under-recovery and hence a lower compensation from the government and upstream oil companies like ONGC, Oil India and Cairn.
Already, all the OMCs run in losses and have to borrow from the market to cover their costs as the government does not pay the subsidy amount in time. The subsidy dues for the last quarter are being carried forward to the next fiscal year in recent times. Lately, the government has paid 50% or more of the OMCs under-recoveries while upstream firms provided about 40%.
The under-recovery for diesel is now at R9.03 per litre while it is R30.63 per litre for kerosene and R490.74 per 14.2 kilogram cylinder for LPG. The under-recoveries were over R10 for diesel, and R520 for LPG even in early December 2012.
The total under-recoveries were at R85,586 crore during the first half of 2012-13?R52,711 crore for diesel, R14,331 crore for kerosene and R18,544 crore for LPG. The total under-recoveries have risen from R78,190 crore in 2010-11 to R1,38,541 crore in 2011-12 and have continued to rise.
Will the move towards export-parity price reduce the government?s subsidy bill?
If the government continues to subsidise half the under-recoveries, estimate shows the shift to export-parity pricing will cut the subsidy bill by about R10,000 crore this fiscal year. This will be a substantial saving considering sluggish revenue growth, slow disinvestment and a lacklustre response to the telecom spectrum auction. For consumers, it won?t make much of a difference as they have to pay the price after a multitude of taxes, dealer commissions and OMC marketing costs. Since the fuels will continued to be sold at subsidised rates, the demand will remain robust and keep the pressure on the oil companies and government. So, the export-parity price does not addresses the main problem.
Why doesn?t it affect the main problem of ballooning under-recoveries?
The main problem is the high under-recoveries on diesel, now at R9 per litre, not just bloats the government?s subsidy bill but actually encourages consumers to consume more of the hydro-carbon. The new formula still keeps the petrol-diesel difference unchanged and hence lures car buyers towards diesel variants.
