Fearing oil refineries will be hit hard by the Finance Ministry's move to change the way petrol and diesel are priced, Oil Minister M Veerappa Moily has asked Prime Minister Manmohan Singh to constitute an expert committee to decide on the issue.
The Finance Ministry has informed the Petroleum Ministry that auto fuel needs to be priced at export parity rather than import parity as the 2.5 per cent customs duty was adding to the under-recoveries of the state-run oil marketing companies without contributing any revenue to the exchequer.
"Immediately switching over to export parity, whether it is possible or feasible is a question which has to be examined," he said.
Oil companies, Moily said, feel the new pricing norm would make oil refining a difficult business.
"I am suggesting to Prime Minister that an expert committee, like the previous ones headed by C Rangarajan and Kirit Parekh (based on whose suggestion trade parity pricing was adopted), can be constituted," he said.
Moily said India's surplus refining capacity, which enables export of large volumes of petroleum products, was a strength and if refineries do not function to their full
capacity, imports of fuel would add to the current Rs 7,00,000 crore of oil import bill.
Sources said Indian Oil, Hindustan Petroleum and Bharat Petroleum together are projected to end the fiscal with close to Rs 1,60,000 crore of under-recoveries or revenue loss on selling diesel, domestic LPG and kerosene below cost.
Upstream oil companies like ONGC are to meet about Rs 60,000 crore of this and the rest Rs 1,00,000 crore was to come from the government as cash subsidy. By changing the pricing methodology, the Finance Ministry wants to cut its cash outgo by about Rs 18,000 crore in the current fiscal.
Sources said like any other product, traditionally domestic refiners enjoyed 5 per cent duty protection by way of higher customs or import duty on petroleum products (finished product) than on crude oil (raw material).
So, if crude oil attracted 5 per cent import duty, finished product was charged a customs duty of 10 per cent. A few years back, the duty on finished products was brought down to 7.5 per cent and crude oil to 2.5 per cent. In fact, the duty on crude oil was brought to zero and that on products to 2.5 per cent a few years ago, effectively reducing the protection refiners enjoyed from flooding of domestic market with cheaper imported