What bearing does the selection of a pricing methodology have on the calculation of under-recoveries?
The Kirit Parikh committee is all set to recommend to the government the continuation of the trade-parity-pricing (TPP) model for calculating under-recoveries of oil-marketing companies (OMCs). Meanwhile, the pricing mechanism decision has pitted the finance ministry, which wants to bring into force the export-parity pricing (EPP) model, with the petroleum ministry that is backing the TPP model.
Different pricing methodologies can be adopted for calculating the under-recoveries suffered by OMCs from the sale of petroleum products (diesel, LPG and kerosene) at discounted rates. Under-recoveries are calculated by subtracting the prices arrived at (using any of the formulae mentioned below) for the products from the prices actually realised by OMCs. An OMC is then compensated by the government or upstream companies for this difference, or the under-recovery it has incurred. Therefore, selecting a pricing methodology is crucial in deciding the extent of the compensation due to the OMC. A higher pricing, as it is with the trade-parity pricing (TPP) model, will lead to higher under-recoveries and thus force the government to pay larger compensation amounts. On the other hand, the EPP model leads to lower prices for petroleum products, which automatically mean lower under-recoveries and, consequently, a lower subsidy compensation burden on the government.
What model is India using currently?
The TPP model, which is a mix of the import-parity pricing (IPP) and the EPP models. Given that India is a major importer of crude oil and has surplus refining capacity, the government, factoring in recommendations of the Rangarajan committee, adopted the TPP model (80% IPP, 20% EPP) in 2006. While the export and import prices don’t vary much, the IPP (landed cost)—which includes tariffs, duties akin to those on domestic products and transportation charges—works out to be higher than the EPP, which is exclusive of import tariff (basic customs duty) and transportation (port and shipping) charges. TPP is beneficial for OMCs but unfavourable for upstream companies and the government as they end up paying a great deal more.
Considering this, the Rangarajan committee felt that TPP, which is a weighted average of import (80%) and export parity (20%) prices, should be used. Such TPP also provides some degree of protection to the domestic refineries.
How is EPP calculated?
It is the price of a product calculated on the basis of the price of importing a particular product processing it and then exporting