MACRO ECONOMICS AND BUSINESS POLICY

PROJECT
ON
DE- REGULATION OF FUEL PRICES BY GOVERNMENT
(ANALYSIS OF ARTICLES)

SUBMITTED TO:
PROF. SHRIRAM PURANKAR
JAYPEE BUSINESS SCHOOL

SUBMITTED BY:
VAIBHAV KUMAR YADAV- 14609099
SHUBHAM GUPTA- 14609082
ROHIT AGARWAL- 14609072
SHUBHANGI MITTAL- 14609085
SRIDEVI AGARWAL- 14609139
SIMRAN ARNEJA- 14609085
MANU MISHRA- 14609104

INTRODUCTION
In Our modern day lifestyle, fuel prices play a crucial role and a slightest
rise, in these prices is a subject of big hue and cry for the masses. As a group of
seven students, we have therefore chosen such vital topic for the analysis
The topic DE- REGULATION OF FUEL PRICES BY GOVERNMENT
has been chosen in the wake of recent change in government policies pertaining to
the same. The articles cover the various aspects of the new policy like explanation,
causes and impact.
The articles include the details of the older policies of previous
governments, to review fuel prices every fortnight. It emphasizes on the reasons as
to why fuel prices need to be revised and impact of international as well as political
environment on domestic fuel market. These Articles put light on adverse impact
of subsidies on exchequer, and suggest ways out of such adversities.

ARTICLE 1:
Right pricing petrol & diesel
Dated: October 27, 2014
RAGHUVIR SRINIVASAN

Oil companies should price their products according to their own cost structures
Fuel pricing has been the bugbear of many a government in India. Though
de-licensing of oil refining and marketing, and decontrol of products such as
naphtha, fuel oil, lubricants and aviation turbine fuel were one of the first
accomplishments of the reform process in the early 1990s, freeing the pricing for
transportation fuels petrol and diesel remained a challenge.
Last weeks decision by the Centre to deregulate diesel prices has to been
seen in this context. For the first time since the short-lived experiment in 2002
when petrol and diesel prices were freed for a short period, oil companies will have
the freedom to manage retail price of diesel on their own and adjust it at periodic
intervals to reflect market levels. Petrol prices were deregulated in June 2010 but
fortnightly revisions have been a reality only since January 2013.
Both petrol and diesel are politically sensitive commodities but unlike petrol,
diesel price changes have a cascading effect across the economy on everything
from bus and rail fares to vegetable and fruit prices. Governments have, therefore,

been wary of freeing diesel pricing and the sustained rise in global oil prices from
2002 until the crisis in 2008 did not help matters. The Modi government has now
grabbed the opportunity provided by a falling global oil price regime prices of
benchmark Brent have fallen from around $105 a barrel in April to about $86 a
barrel now to push through deregulation of diesel and it needs to be
complimented for this. Yet, deregulation of diesel, noteworthy as it is, is only the
first step in much-needed reform of the oil sector.
What we immediately need is some transparency and reform of the methods
followed by the oil companies while setting fuel prices, whether petrol and diesel
or cooking gas and kerosene. The concept of under-recovery has to be jettisoned
and competition between the different players public and private needs to be
encouraged. That alone will allow proper price discovery for these economically
sensitive fuels.
The concept of under-recovery is unique to India. Under-recoveries are
nothing but the difference between the oil companies desired price of a fuel, say
diesel, and its prevailing retail price in the domestic market. This desired price is
calculated on trade-parity basis that takes into account the landed cost of imported
fuel and the price at which it is exported by domestic refineries. Presently, the ratio
is 80:20 in favour of landed cost. For instance, if the price of a litre of diesel as
calculated on trade-parity basis is, say, Rs.70 a litre and the oil companies are
selling diesel in the retail market at Rs.65 a litre, the under-recovery will be Rs.5
a litre.
Under-recovery is not the same as a loss which happens when a producer is
forced to sell his product below cost. Oil companies refine crude oil to produce
diesel (and other products such as petrol, cooking gas and kerosene) in their own
refineries in India. They have not been importing diesel or petrol for a decade now,
thanks to a sharp increase in domestic refining capacity.
Given this, why should the landed cost of imports, which includes items
such as freight, insurance, handling charges and, of course, customs duty, be
considered for fixing domestic retail price? This is the unfair part about underrecoveries, a word that is often cleverly used interchangeably with losses. Let this
be clear: under-recovery is a notional concept and does not necessarily mean a
loss. The only exception when it could include a loss is where global crude oil
prices surge to abnormal levels and the retail price of fuels remains unchanged.
There has not been such a situation in recent years.

But why do oil companies harp on under-recoveries and demand that

domestic price should be linked to that? Simply because the landed cost, which
includes duties and other levies, offers them protection to cover up possible
inefficiencies in their operations. This protection is unnecessary and unfair to
domestic consumers and all it does is promote inefficiency. It is no secret that the
public sector oil companies are saddled with high costs for reasons ranging from
excess staff to duplication of facilities between them. By linking retail price to
under-recovery all that the government does is ensure that such inefficiencies are
passed on to consumers. Again, global prices of crude oil and refined fuels such as
petrol and diesel do not always move in tandem. The forces that drive their
respective markets are different. For instance, the international market price of
petrol and diesel can spike if there is a refinery outage somewhere in the world
causing supply disruption. There have been instances in the past when refined fuel
prices have surged due to a fire or a maintenance shutdown by a particular refinery.
Crude oil prices are not affected by such factors. By taking into account landed
cost of refined fuels rather than crude oil, the oil companies may be forcing
consumers to pay a higher price when there is really no supply problem within the
country.
Cost-plus pricing
The ideal way to go is for oil companies to price their products according to
their own cost structures. Each company has a unique cost structure which is a
factor of its refining efficiency. The final market price should be discovered on the
basis of the cost of crude plus refining costs and the margin of the oil company.
This can happen only in a competitive environment where the oil companies
compete with each other and against the three private players Reliance
Industries, Essar and Shell. As of now, the PSUs operate as a cartel when pricing
their products, which is an anti-competition practice. Clearly, the next item on the
agenda for the government should be to push the oil companies truly into the
market era where fuel prices are linked to efficiencies and vary not just between
the different players but between petrol stations of the same player based on which
one is more efficient. That will be real reform.

SOURCE:
http://www.thehindu.com/business/Economy/right-pricing-petrol-diesel/article6533469.ece

ANALYSIS:
BY VAIBHAV KUMAR YADAV

The article talks about the Indian governments biggest challenge of

deregulation of transportation fuel- petrol and diesel prices. Before this,
deregulation experiment on fuel prices was done in 2002, but only for a short time.
Since January fortnightly revisions or revision of prices every 15 days, is the
reality.
According to the article, petrol and diesel are politically sensitive
commodities. The governments, so far have been cautious of freeing diesel prices
as the prices of other commodities are dependent on the same. The Modi
government has now grabbed the opportunity provided by a regime of global crude
oil price fall. The benchmark Brents per barrel prices of diesel in October were
$86 as compared to $105 in April. This fall in prices is the reason of this much
needed reform in the oil sector.
The transparency and reforms of pricing methods are the need of the hour
for the oil companies, while setting up the prices of petrol, diesel, LPG or
kerosene. Further, the competition between public and private players needs to be
encouraged.
The article also talks about the concept of under- recovery, which is the
difference between oil companies desired price of any fuel, which is calculated on
trade parity basis, and its prevailing retail prices in domestic market.
Let this be clear: under-recovery is a notional concept and does not
necessarily mean a loss. Oil companies refine crude oil to produce diesel (and
other products such as petrol, cooking gas and kerosene) in their own refineries in
India. They have not been importing diesel or petrol for a decade now, thanks to a
sharp increase in domestic refining capacity.
Given this, why should the landed cost of imports, which includes items
such as freight, insurance, handling charges and, of course, customs duty, be
considered for fixing domestic retail price? This is the unfair part about underrecoveries, a word that is often cleverly used interchangeably with losses. The
only exception when it could include a loss is where global crude oil prices surge

to abnormal levels and the retail price of fuels remains unchanged. There has not
been such a situation in recent years.
The article also suggested the cost plus pricing as the apt technique for oil
companies. Each company has a unique cost structure which is a factor of its
refining efficiency. The final market price should be discovered on the basis of the
cost of crude plus refining costs and the margin of the oil company.

MY LEARNINGS FROM THE ARTICLE:

Pricing of fuels has been a politically sensitive issue.

The fall in can be attributed to recent international fall in prices of oil per barrel.
The concept of under recovery: it does not necessarily mean loss; it is the
difference between oil companies desired price of any fuel, which is calculated
on trade parity basis, and its prevailing retail prices in domestic market.
Transparency in the pricing is the essence.
Competition between private and public players is must.
Cost plus pricing is one of the apt methods of pricing of these fuels.

ARTICLE 2:

Modi government needs to decontrol retail prices of diesel

Dated: October 17, 2014
JAIDEEP MISHRA

The significant drop in petroleum prices in the global markets is reason

enough to bring long-pending oil sector reforms on to the front-burner. In a couple
of years, India is slated to be the third-largest consumer of crude oil, the vast
bulk of which is imported at the going international rates, and we so need to
purposefully carry out policy and pricing reforms of petro- products to boost
efficiency, raise productivity and bring down costs in our large and fast-growing
oil economy.
Abroad, in the mature retail oil markets, about half the off take is by
'independent' retailers, with no presence in upstream production or refining, but
which nevertheless are able to competitively seek custom with efficient logistics
and quality delivery. We surely need such modernisation here. In a large market, to
continue with the effective ring-fencing of oil sales would be at huge national cost.
Besides, in a scenario of much easier crude prices, and with expert analyses
sanguine that the softer trend would continue for an entire year and more, the way
ahead for the government is to speedily decontrol retail prices of diesel, which is
by far the most-used petro-product, to better determine scarcity value going
forward.

The policy change would make eminent sense politically too, in

the backdrop of weakening prices. We need to promptly rationalise the huge
consumption subsidies on oil products, remove distorting taxes on them, and
induce reforms and opening up in oil marketing. In tandem, what's necessary is to
systematically and innovatively overhaul the subsidy regime both for cooking gas
and domestic kerosene via direct benefit transfers using Aadhaar. The diffusion of
light aids, like solar lanterns, would be environmentally benign and far cheaper.
The fact remains that for a decade now, flaring prices of crude and non
revision in domestic prices of petro- goods have led to huge under-recoveries, extra
borrowings and massive consumption subsidies on oil products that have wrought
economic havoc. Hence the need for proper price signals to deter runaway demand
for automotive fuels.
Meanwhile, the declining trend in global crude prices has much to do with a
comfortable demand-supply situation, with demand muted and supply relatively
buoyant. The oil cartel Opec reduced output of late. But the move was more than
offset by an incremental increase in non-Opec production that accounts for the
major part of global output of crude.
The US, meanwhile, remains by far the largest oil consumer, notching over
19 million barrels per day (bpd). China comes next with roughly 10.5 million bpd.
The consumption in India is projected to rise to just over 4 million bpd in a year or
two. The International Energy Agency estimates world oil consumption at 93.5
million bpd for 2014, and that the figure would barely increase to 93.8 million bpd
next year in the face of subdued off take and lackluster demand.
The policy reform in oil and the changeover to market-determined prices for
products like diesel would be fiscally transformative, bringing about much better
allocation of resources for investment right across the board, and put paid to openended consumption subsidies on petro-goods in the Budget, most of which are
anyway appropriated by the non-poor.
In the 1990s, an expert group led by Vijay Kelkar, who then headed
administration in the petroleum ministry, estimated that proposed oil sector
reforms would lead to benefits that would cumulatively add up to Rs 1 lakh crore.
Fast-forward to today, and taking into account present costs, the corresponding
savings on pricing reform and attendant policy changes would more likely mean
savings on budgeted subsidies of about Rs 1 lakh crore on an annual basis. There
are clearly many things money can't buy what it could 20 years ago.

The point remains that subsidies, giveaways and populist non- revision of
domestic prices of oil products show up as under-recoveries for the public sector
oil marketing companies. These, in turn, give rise to unscheduled borrowings, and
soak up liquidity and generally add to the cost of funds for all and sundry. It is
notable that the under-recoveries on diesel have now been wiped out after
incremental price revision over several months.
The previous government did decontrol petrol prices and bulk sales of
diesel. The Modi government now needs to follow through and decontrol retail
prices of diesel as well. Oil subsidies must not burn a big hole in the pocket of the
exchequer.

SOURCE:
http://articles.economictimes.indiatimes.com/2014-10-17/news/55148511_1_bpd-oil-cartelopec-world-oil-consumption#

ANALYSIS:
BY ROHIT AGARWAL

The significant fall in the petroleum prices in global markets is the reason
for bringing the oil sector reforms. In coming couple of years, India will become
third largest consumer of crude oil. The good quantity of it is purchased at
prevailing international rates, so pricing reforms are necessary.
In foreign countries, which have a mature oil retail markets, half the off take
is by independent retailers. Such modernisation or reform is needed here as well.
The policy change will make sense politically too, since the prices are falling. The
huge consumption subsidies need to be rationalized and we need to remove taxes,
induce the reforms and open up the oil markets. The subsidies could be directly
transferred to Aadhaar card. The devices like solar lanterns would be safer for
environment and cheaper.
The reforms are necessary because the flaring prices of crude oil and non
revision of domestic prices, of petroleum products have led to huge under
recoveries, massive borrowings and consumption subsidies on oil products and
have wrought economic havoc.
The US is the largest oil consumer, notching over 19 million barrels per day
(bpd). China comes next with roughly 10.5 million bpd. The consumption in India
is projected to rise to just over 4 million bpd in a year or two. The International
Energy Agency estimates world oil consumption at 93.5 million bpd for 2014, and
that the figure would increase to 93.8 million bpd next year.
Policy of oil price determination by market forces for petroleum products
would be fiscally transformative, bringing about bringing about much better
allocation of resources for investment right across the board.
In the 1990s, a group of experts led by Vijay Kelkar, then head of
administration, petroleum ministry, estimated that proposed oil sector reforms
would lead to cumulative benefits of up to Rs 1 lakh crore. Fast-forward to today,
and taking into account present costs, the corresponding savings on pricing reform
and attendant policy changes would more likely mean savings on budgeted
subsidies of about Rs 1 lakh crore on an annual basis.

It is notable that the under-recoveries on diesel have now been wiped out
after incremental price revision over several months. The previous government did
decontrol petrol prices and bulk sales of diesel. The Modi government now needs
to follow through and decontrol retail prices of diesel as well. Oil subsidies must
not burn a big hole in the pocket of the exchequer.

MY LEARNINGS FROM THE ARTICLE:

Falling international fuel prices is one major reason of introduction of pricing
reforms in this sector.
Like in foreign markets, independent players need to form considerable part of
retail petroleum market.
Reform is necessary because flaring prices of petroleum products and non
revision of domestic prices has led to enormous pressure on exchequer, under
recoveries, and extra borrowings.
USA is the largest oil consumer, notching over 19 million bpd.
China follows USA, notching roughly around 10.5 bpd.
Indias consumption is projected to rise upto million bpd in next two years.
In the 1990s, a group of experts led by Vijay Kelkar, then head of
administration, petroleum ministry, estimated that proposed oil sector reforms
would lead to cumulative benefits of up to Rs 1 lakh crore.
To further help our cause of reducing burden on economy, we can use devices
like solar lanterns, would be safer for environment and cheaper.

ARTICLE 3:

Narendra Modi government steps up economic reforms with

disinvestment post oil reforms
Dated: October 21, 2014
MANOJ KUMAR AND KRISHNA N DAS

The government promised on Monday to open up the coal industry to private

players and moved closer to selling a stake in state-owned Oil and Natural Gas
Corp (ONGC), as Prime Minister Narendra Modi picked up the pace on economic
reform days after relaxing fuel price controls.
Using an executive order, the Cabinet agreed to allow private companies to
mine and sell coal at an unspecified future date, Finance Minister Arun Jaitley said.
That sets the stage for the biggest liberalisation of the domestic industry in more
than 40 years.
The success of Bharatiya Janata Party (BJP) in the Maharashtra and
Haryana assembly elections last week capped several days of action on the
economic front and has given PM Modi more room to cut through a thicket of
regulations and state controls he says holds back Asia's third-largest economy.

"Reform is the art of the possible," Jaitley earlier told TV network ET Now,
hinting that more was to come. "In the first year, when people expect lot of reforms
and there is lot of popular support behind the reform process, it is more easily
possible," the Finance Minister said.
The Prime Minister was elected in May on promises he would create jobs
and rejuvenate the domestic economy, but investors and economists were
disappointed by his first budget and a lack of early progress on fixing structural
economic problems.
In the last week, Modi has gone some way towards quelling those concerns,
putting in a reform-minded team at the Finance Ministry that includes prominent
US-based economist Arvind Subramanian to help formulate the budget and policy
as the Chief Economic Adviser (CEA).
The economy is showing some signs of revival and inflation has plummeted,
aided largely by a drop in global oil prices.
On Saturday, the Cabinet deregulated diesel pricing and raised the price the
government pays producers of natural gas by a third to US $5.61 per million
British thermal units (mmBtu).
Modi also began an overhaul of creaky labour rules, cutting the power of
labour inspectors and slashing the red tape for small companies that make the
country one of the toughest places in the world to do business.
The domestic stock market, bonds and rupee currency all performed strongly on
Monday in response to the new economic policies and the victories by the BJP in
Maharashtra and Haryana.
Undoing Indira
Former Prime Minister Indira Gandhi nationalised the coal industry in 1972,
creating one of the world's largest mining companies, state-owned Coal India
(CIL).
The system was intended to provide steady supplies of fuel and help
industrialisation, but CIL is now deeply dysfunctional. Most of the country's
electricity is generated by coal, but long power cuts are the norm in major parts of

the nation. Despite having the world's fifth-largest coal reserves, India is the
world's third largest importer of the resource.
As of last Wednesday, 64 out of 103 power stations had coal for less than a week,
mainly due to a shortfall in supplies from Coal India, according to the power
ministry.
Private companies are already allowed to mine supplies for their own power plants
and other industrial projects, and CIL hires some private firms to operate mines.
But until now private companies have not been permitted to sell coal.
"This would lead to an optimum utilization of the national resource," the Finance
Minister told reporters, adding that there was no move to fully privatise CIL.
However, the government does plan to sell 10 per cent of its majority holding in
the inefficient behemoth, which is plagued by corruption. Unions oppose the sale.
The Supreme Court last month scrapped the licenses for 214 coal fields that
supplied power, cement and other companies over allegations of graft. Monday's
decision to liberalise the coal industry was tacked onto an executive order to allow
the auction of the scrapped coal fields.
The executive order, known as an ordinance, takes immediate effect but must be
approved by parliament within a few months. Modi's government will have to win
cross-party support for its plan, since it does not have a majority in Rajya Sabha.
Selling stakes to pay the bills
The reforms in diesel and gas pricing make ONGC, the public sector oil producer,
more attractive to investors by reducing the hefty discount on crude oil sales that it
must give to fuel retailers.
On Monday, the administration's top privatisation official met bankers in Mumbai,
to discuss the sale of a 5 per cent stake ONGC, a top Finance Ministry official said.
Shares in ONGC, the second-largest listed firm in India by market value, gained
5.6 per cent on Monday. The government has a stake of 68.94 per cent in the
company, which has shares of in oil and gas fields across the globe.
The Finance Ministry hopes to raise up to $3 billion from the ONGC sale, almost a
quarter of its target for asset sales for the current financial year.

Citigroup and HSBC are among five banks chosen to manage the planned sale of a
stake in ONGC, sources told Reuters in August.
The ONGC share sale was likely to be held in the first half of November, two
people directly involved with the transaction said on Monday. The pre-sale
marketing road shows for the offering are expected to be completed by the first
week of the month, they said.
A top finance ministry official, who spoke on conditions of anonymity because of
the sensitivity of the topic, also told reporters the government wanted to pass a bill
in parliament's next session to free up foreign investment in the insurance industry.
Jaitley, in his maiden budget in July, set a target of Rs 58,425 crore to be raised by
the sale of shares in public sector undertakings (PSUs) and minority stakes in
private companies. Another major planned sale is of a 10 per cent stake in giant
CIL.
The income is key to meeting a challenging goal of a fiscal deficit of 4.1 per cent
of gross domestic product for the year ending March 31, 2015. Tax revenue has
been less than budgeted this year, and government finances have been stung by a
large bill for tax rebates.
One restraint on PM Modi's government is his small bench of ministers, many
holding multiple portfolios. Jaitley, for example, doubles as defence minister. The
Information and Broadcasting Minister Prakash Javadekar, who also acts as
environment minister, last week suggested that an expansion of the cabinet was
imminent.
SOURCE:
http://m.businesstoday.in/story/narendra-modi-economic-reforms-disinvestment-drivediesel/1/211569.html

ANALYSIS:
BY SHUBHANGI MITTAL

The article talks about governments promise of opening up the coal industry
to the private players and also selling a stake in the state owned Oil And Natural
Gas Corporation.
Using an executive order, the Cabinet agreed to allow private companies to
mine and sell coal at an unspecified future date, setting the platform for the biggest
liberalization in the industry in last 40 years.
The economy is showing some signs of revival and inflation has dropped,
aided largely by a drop in global oil prices.
On Saturday, the Cabinet deregulated diesel pricing and raised the price the
government pays producers of natural gas to US $5.61 per million British thermal
units (mmBtu). Modi also began an overhaul of old fashioned labour rules, cutting
the power of labour inspectors and slashing the red tape for small companies.
The domestic stock market, bonds and rupee currency all performed strongly
on Monday in response to the new economic policies and the victories by the BJP
in Maharashtra and Haryana.
The middle section of this article talks about Modi governments policies
undoing the former PM Indira Gandhis policy of nationalizing the coal sector. The
former system was intended to provide steady supplies of fuel and help
industrialisation. But Coal India limiteds situation is downtrodden. Despite having
the world's fifth-largest coal reserves, India is the world's third largest importer of
the resource, and power cuts are common.
The executive order, known as an ordinance, takes immediate effect but
must be approved by parliament within a few months. Modi's government will
have to win cross-party support for its plan, since it does not have a majority in
Rajya Sabha.
The last section talks about selling the stakes of Oil and Natural Gas
Corporation, in which government has 68.94 percent stake. The Finance Ministry
hopes to raise up to $3 billion from the ONGC sale. Arun Jaitley, in his maiden
budget in July, set a target of Rs 58,425 crore to be raised by the sale of shares in
public sector undertakings (PSUs) and minority stakes in private companies.
Another major plan is to sell a 10 per cent stake in giant CIL.

MY LEARNINGS FROM THE ARTICLE:

The current policy reform is the biggest such reform in last forty years.
The Cabinet deregulated diesel pricing and raised the price the government pays
producers of natural gas.
Article talks about Modi governments policies undoing the former PM Indira
Gandhis policy of nationalizing the coal sector.
Despite having the world's fifth-largest coal reserves, India is the world's third
largest importer of the resource
Article talks about selling the stakes of Oil and Natural Gas Corporation, in
which government has 68.94 percent stake.
Arun Jaitley, in his maiden budget in July, set a target of Rs 58,425 crore to be
raised by the sale of shares in public sector undertakings (PSUs).

ARTICLE 4:

Government oil subsidy bill to be cut by over 60% in FY15

Dated: October 15, 2014
PTI

With international oil prices dropping to multi-year lows, government's oil

subsidy bill is likely to be slashed by over 60 per cent in the current fiscal.
The government currently controls diesel, domestic LPG and kerosene and prices
them at rates below cost. The losses oil firms thus incur are made good by way of
cash subsidy and asking upstream oil producers like ONGC to give discounts.
In 2013-14, the government provided Rs 70,772 crore by way of cash
subsidy while upstream firms picked up Rs 67,021 crore tab.
With oil prices dropping to four-year low of less than $84 per barrel, the underrecovery or revenue loss arising out of selling diesel, domestic cooking gas (LPG)
and kerosene at prices lower than imported cost this fiscal is estimated at Rs
86,080crore.
This is lower than Rs 1, 39,869 crore gross under-recovery last fiscal,
industry and government sources said. Sources said the under-recovery in the first
quarter (April-June) was Rs 28,691 crore. This was mostly met by Rs 11,000 crore
cash subsidy from the government and Rs 15,547 crore coming from ONGC, Oil

India Ltd (OIL) and GAIL. The remaining Rs 2,144 crore was absorbed by fuel
retailers (IOC, BPCL and HPCL).
In second quarter, the under-recovery is estimated at Rs 21,198 crore with
diesel accounting for Rs 2,848 crore as compared to Rs 9,037 crore in the June
quarter. Kerosene under-recovery was Rs 6,950 crore (Rs 7,524 crore in Q1) and
LPG was Rs 11,400 crore (Rs 12,129 crore in Q1). With diesel under-recovery
being wiped out last month and fuel retailers in fact making a profit of over Rs 2 a
litre, the share of nation's most consumed fuel in overall under-recovery for 201415 fiscal will be just Rs 12,189 crore. Sources said the government has not account
the cash subsidy and upstream share for Q2.
While the government had deregulated or freed petrol prices in June 2010,
diesel prices have been raised by up to 50 paisa a litre every month since January
2013. The hikes together with a sharp drop in international oil prices have helped
wipe out the under-recovery or loss on diesel.
Currently, oil firms are making Rs 2.25-2.50 a litre profit on diesel, which
should have been passed to consumers in form of a price cut but the same has been
postponed due to assembly elections in Maharashtra and Haryana
Oil firms lose Rs 31.22 a litre on kerosene and Rs 404.64 per 14.2-kg LPG
cylinder.
Sources said the government had provided Rs 1,00,000 crore cash subsidy in
2012-13 when under-recoveries touched an all-time high of Rs 1,61,029 crore. In
the preceding year, it had provided Rs 83,500 crore.
SOURCE:
http://m.economictimes.com/industry/auto/news/oil-and-lubes/Government-oil-subsidybill-to-be-cut-by-over-60-in-FY15/articleshow/44826054.cms

ANALYSIS:
BY MANU MISHRA

The article is about Government oil subsidy. The government currently

controls diesel, domestic LPG and kerosene and prices them at rates below cost.
With international oil prices dropping to multi-year lows, governments oil
subsidy bill is likely to be slashed by over 60 percent in the current fiscal.
The government currently controls diesel, domestic LPG and kerosene and prices
them at rates below cost. The losses oil firms thus incur are made good by way of
cash subsidy and asking upstream oil producers like ONGC to give discounts.
Sources said the under-recovery in the first quarter (April-June) was Rs
28,691 crore. This was mostly met by Rs 11,000 crore cash subsidy from the
government and Rs 15,547 crore coming from ONGC, Oil India Ltd (OIL) and
GAIL. The remaining Rs 2,144 crore was absorbed by fuel retailers (IOC, BPCL
and HPCL). In second quarter, the under-recovery is estimated at Rs 21,198 crore
with diesel accounting for Rs 2,848 crore as compared to Rs 9,037 crore in the
June quarter. Kerosene under-recovery was Rs 6,950 crore (Rs 7,524 crore in Q1)
and LPG was Rs 11,400 crore (Rs 12,129 crore in Q1).
While the government had deregulated or freed petrol prices in June 2010,
diesel prices have been raised by up to 50 paisa a litre every month since January
2013. The hikes together with a sharp drop in international oil prices have helped
wipe out the under-recovery or loss on diesel.
Currently, oil firms are making Rs 2.25-2.50 a litre profit on diesel, which
should have been passed to consumers in form of a price cut but the same has been
postponed due to assembly elections in Maharashtra and Haryana.

ARTICLE 5:
Diesel price may come down for first time in 7 years
Dated: September 9, 2014
RAJEEV JAYASWAL

India is considering a cut in diesel prices for the first time in seven years
amid global crude price dropping below $100 a barrel for the first time in more
than a year, a move that could take some of the sting out of inflation as a patchy
monsoon threatens a rise in food prices.
That in turn could allow the central bank to ease up on its interest-rate stance
at the next monetary policy announcement, boosting revival prospects.
This comes as the government has been considering freeing up diesel prices, since
subsidy has been narrowed by incremental, monthly price increases.
"If this downward trend in international oil prices continues and the rupee
appreciates even marginally, there will be over-recovery from this month," said a
senior executive at oil PSU who didn't want to be named.
"We intend to pass this to customers," said the executive. A price review is
expected on September 15.But the decision regarding diesel price cut will be taken
by the government because it is a regulated fuel."
The government is still evaluating the political situation in poll-bound states
before deregulating the fuel, government and industry officials said.

Benchmark Brent crude fell on Monday to a 14-month low of $99.59 per barrel,
dropping below $100 for the first time since June last year because of sluggish
demand from major importers, particularly China. Meanwhile, the rupee has
appreciated marginally against the dollar, which has almost aligned pump prices of
diesel with market rates.
According to the oil retail industry, pump prices of diesel have not been cut
in the last seven years except for a marginal reduction on July 25, 2012, because of
changes in distribution costs. Oil companies review petrol and diesel prices every
fortnight. While petrol prices change on the 15th and 30th of every month, the
government has been raising diesel prices by 50 paise every month since January
last year. The previous UPA government had decided to raise diesel rates in small
monthly doses until pump prices were aligned with market rates and it could be
deregulated. According to oil companies, a petrol price cut is imminent for the
fourth time in a row.
"No decision has been taken on diesel price deregulation. The oil ministry
has not yet circulated the Cabinet note to this effect," a senior government official
said on condition of anonymity. The oil ministry is keeping a close watch on fuel
price movements and is ready to present a draft cabinet note at short notice,
officials said.
The government is hesitant to free diesel prices just before assembly
elections in four states - Jammu & Kashmir, Maharashtra, Bihar and Jharkhand.
"International petrol and diesel rates are highly volatile. Political prospects of the
ruling BJP will be hampered in case their rates jump during assembly elections,"
one official said. According to officials, a final decision on deregulation will be
taken after consulting the finance ministry.
The diesel subsidy used to be a major drag on the exchequer, having
accounted for about 45-50% of total fuel subsidies until January last year. The
UPA government's move to make a monthly increase narrowed the diesel subsidy
to an estimated Rs 19,584 crore in the current financial year from Rs 62,837 crore
in 2013-14.

ANALYSIS:
BY SRIDEVI AGARWAL

This article is about to cut diesel prices for the first time in seven years amid
global crude price plummeting below $100 a barrel for the first time in more than a
year to cut diesel prices for the first time in seven years amid global crude price
plummeting below $100 a barrel for the first time in more than a year.
The government is still evaluating the political situation in poll-bound states
before deregulating the fuel.
International petrol and diesel rates are highly volatile. Political prospects
of the ruling BJP will be hampered in case their rates jump during assembly
elections, one official said. According to officials, a final decision on deregulation
will be taken after consulting the finance ministry.
The diesel subsidy used to be a major drag on the exchequer, having
accounted for about 45-50% of total fuel subsidies until January last year. The
UPA governments move to make a monthly increase narrowed the diesel subsidy
to an estimated Rs 19,584 crore in the current financial year from Rs 62,837 crore
in 2013-14.
The result has been that petrol prices have moved in tandem with global cost
and retail rates being reduced on five occasions since August on falling oil rates.
Prices have cumulative come down by close to Rs 7 per litre in last two-and-half
months. On diesel, the entire under-recovery or loss has been eliminated and oil
firms started making profit from second half of September. The over-recovery or
profit has since reached Rs 3.56 per litre. Deregulation would mean that the
government and state-owned explorers including Oil and Natural Gas Corp
(ONGC) are no longer subsidising diesel. Finance Minister Arun Jaitley had
budgeted Rs 63,400 crore for petroleum subsidies which was 25 per cent lower
than previous fiscal. But unlike past, the subsidy bill is unlikely to overshoot the
budgeted amount due to fall in oil rates.
Oil subsidy account for a quarter of Rs 2.51 lakh crore. Originally, petrol
and diesel prices were deregulated in April 2002 when the NDA government was
in power. Administered pricing regime, however, made a back-door entry towards
the end of NDA regime in the first quarter of 2004 when crude prices started
inching up. The Congress-led UPA controlled rates as international oil prices went

through the roof. In June 2010, however, it freed petrol price from its control and
rates have since then moved more or less in tandem with cost. It had in-principle
decided to deregulate diesel, which is used in everything from cars and trucks to
back-up power generators and agricultural water pumps. The fuel accounts for 43
per cent of the nation's fuel consumption.
In January 2013, the then UPA government decided to deregulate diesel
prices in stages through a monthly 50 paisa a litre increase. Rates were last hike on
September 1 after which losses have been wiped off. It is estimated that underrecovery or revenue loss on selling diesel, LPG and kerosene at prices lower than
imported cost this fiscal will be around Rs 86,080 crore. This will have to be met
by cash subsidy from government as well as dole from upstream oil producers like
ONGC. The under-recovery estimate for the current fiscal is lower than Rs
1,39,869 crore of last fiscal. In 2013-14, the government had provided Rs 70,772
crore by way of cash subsidy while upstream firms picked up Rs 67,021 crore tab.

ARTICLE 6:

Budget 2014: Government to de-regulate diesel prices; reduce

subsidized LPG cylinders this fiscal
Dated: July 10, 2014
SARITA C SINGH

The Budget has proposed to decontrol diesel prices and reduce the number
of subsidised cooking gas cylinders in the current financial year to eliminate yearly
subsidy burden of Rs 140,000 crore.
"It is expected that the gap between administered price and market price of
diesel would be eliminated by early FY2014-15. Thereafter, both petrol and diesel
would be deregulated and linked to market prices, leaving PDS, kerosene and LPG
subsidy," the Budget said.
According to oil ministry data, under-recovery stood at Rs 3.40 per litre on
sale of diesel and at Rs 449.17 on sale of LPG cylinder. Diesel under-recoveries
had fallen to Rs 1.65 per litre by June 15 but rose soon after the Iraq crisis. The
government has been gradually increasing diesel prices by Rs 0.50 per litre every
month.

Fuel subsidy in 2013-14 was about Rs 140,000 crore, of which diesel accounted for
over Rs 62,800 crore.
"If there are no international shocks in the oil sector, it is expected that in a
year the government will be able to decontrol diesel fully. With rising fuel subsidy,
there is need to cap the subsidised cylinders at a more realistic level," the Budget
said.
The move aims at reducing the government's total subsidy outgo on food,
petroleum and fertilisers to 2% of GDP in the current financial year from 2.3% last
fiscal.
"In order to achieve the fiscal targets of fiscal consolidation it is essential
that government follows the policy of progressively reducing the expenditure on
subsidy through improved targeting of beneficiary," the Budget said.
However, stabilisation of external exchange and stable international crude
oil prices are critical in the process of rationalisation of diesel prices," it added.
Source:
http://articles.economictimes.indiatimes.com/2014-07-10/news/51301153_1_diesel-pricespetrol-and-diesel-oil-ministry-data

ANALYSIS
BY SHUBHAM GUPTA

According to the budget 2014 , Modi government has de-regularized the

diesel prices as it is been decided that in this fiscal year 2014 - 2015 the diesel
prices
are to be regulated by the market prices of the crude oil . Similarly, In the
previous government the petrol prices were also been de-regulated by the
government
Here is some data of oil ministry:
Under recovery stood at Rs 5.40 per litre on sale of diesel and Rs 449.17 on sale
of LPG cylinder.
Diesel under recoveries had fallen to Rs 1.65 per litre but rose due to Iraq
crises.
Fuel subsidy in 2013 2014 was about Rs 1, 40,000crore of which diesel
accounted for over Rs 62,800 crore.
There might be several reasons behind it according to various sources one of
reasons behind this de-regulation is that as the people always blame the
government for the increasing prices of petrol and diesel, But by de- regulating the
prices the government took a safe side and from now they arent responsible for
any increase and decrease of the prices of diesel as now the market is having the
control on it. Sidewise, the prices of the crude oil is going down which will
further reduce the prices of petrol, diesel, kerosene, LPG etc.

The reasons behind this are as follows:

U.S shale gas production
Low demand from china ( due to stagnant economic growth )
Crisis in Arab countries ( black marketing of oil through ISIS )

Since our economy is import oriented, So this step taken by the Modi government
will make considerable efforts in making our economy export oriented rather being
import oriented.

Current account deficit (CAD) = Import - Export

MY LEARNINGS FROM THE ARTICLE:

It is good to let market control the commodities, because that will

show the real projection of our country.
Diesel- The fuel of our economy should be top priority as because
most of our other sectors are directly or indirectly related to it.
Making diesel cheap will also leads to cheap transportation and
transportation is a common link in all the sectors.

Conclusion:

Towards the end, we would like to say that all these articles
converge on the point that new policy on petro- products aims to
reduce burden on exchequer by privatizing this sector, reducing
subsidies on LPG, petrol and diesel.
Crux of the various articles is the impact of the new policy
of the Modi government. It puts light on the pricing mechanisms
opted by this industry, like cost plus pricing etc.
The articles talk about Arun Jaitleys targets to raise funds
through privatisation, and comparing it with Indira Gandhis
nationalisation policy.
All in all, we have tried to analyse the very crucial subject
of petroleum pricing policy, and tried to present various aspects
of this sensitive issue.