Kirit Parikh panel for freeing petrol, diesel prices

NEW DELHI: Kirit Parikh on Wednesday presented the report on fuel pricing to Petroleum Minister Murli
Deora. The panel in its report advocated total decontrol of oil prices, while recommending and immediate
increase in prices of kerosene by Rs 6 per litre and LPG rates by Rs 100 a cylinder.

The committee headed by economist Kirit Parikh also pegged the losses of state-run oil marketing
companies at Rs 40,000 crore on account of having to sell transport fuels at below cost.

"The fuel pricing policy will address government's fiscal problems," said Parekh at a press conference. In its
report the panel suggested to free petrol prices at refinery and at retail level. PSU oil companies at present
lose Rs 3/litre of petrol. It also recommended retail diesel prices be market driven.

"There is no way we can continue with the current pricing policy," said Parikh while discussing the
recommendations here.

The government may take a decision on freeing petrol and diesel prices after the report. Price of petrol may
go up by Rs 4.70 a litre and diesel by Rs 2.30 a litre if the government gives the pricing freedom to state-
owned oil marketing companies - IndianOil Corporation (IOC) Bharat Petroleum (BPCL) and Hindustan
Petroleum (HPCL).

A price hike of petrol and diesel is imminent unless finance ministry pays full cash compensation to state-
owned oil companies for kerosene and cooking gas, an oil ministry official said requesting anonymity. The
finance ministry has decided to pay a compensation of only Rs 12,000 crore in 2009-10 to public sector
oilcos for selling kerosene and cooking gas below cost as against total estimated revenue loss of Rs 31,000
crore in the fiscal year.

In July last year, the cabinet had taken a decision to meet the entire revenue loss of public sector OMCs on
cooking gas and kerosene either through oil bonds or cash.

Losses on petrol and diesel were to be compensated by state-owned upstream companies - ONGC, Oil India
and Gail India, he said. The upstream companies have already paid about Rs 8,364 crore to the three public
sector oil companies for their losses on auto fuels in the first three quarters of 2009-10.

The finance minister, however, wants to reduce fuel subsidy burden. He is in favour of deregulation, as
mounting subsidy burden is a major concern for the public exchequer. The government had to pay over Rs
71,000 crore in 2008-09 as fuel subsidy though oil bonds.

Parikh report is bad for the country, worse for aam aadmi

A recent news story on the just-released Kirit Parikh committee report on pricing of petroleum products had
a headline suggesting that “Parikh’s bold oil reforms” could “slip on politics” . I pray this happens because
the report’s recommendations are bad for the country and worse for the aam aadmi.

Bad for the country because the recommendations do not address the problems of petroleum pricing in
their entirety and appear driven by the desire to allow private sector refiners, originally set up for export
of products, an entry into the domestic market under the garb of liberalizing prices of petrol and diesel.
While I am an ardent supporter of all reforms that promote a level playing field, such reforms cannot
and should not be implemented in a piecemeal manner without removing all the distortions that plague the
oil sector.
Worse for the aam aadmi because, barring PDS kerosene, the rest of the petroleum products are currently
priced outside the reach of the bottom two-thirds of my fellow Indians and we are talking of further price
increases. Access to modern commercial energy in India is one of the lowest in the world and worse than
many sub-Saharan countries.

Everyone among the bottom two-thirds of this country’s population does not have access to or the
capacity to pay for even PDS kerosene. And even if one assumes that the top one-third does not
consume any PDS kerosene (a completely incorrect assumption considering the amount of leakage for
adulteration with diesel),

the per capita allotment of PDS kerosene to the bottom two-thirds of the population is a little over one
litre a month. But even this abject subsistence level of allotment (actual consumption is much lower) is not
spared by the “bold” Parikh committee.

Large parts of the report are misleading, and age-old but inappropriate arguments are used to justify the key
recommendations. Let me highlight a few fallacies.

Contrary to the tenor of the report, there are no net subsidies in the petroleum sector. The total tax
collected from the petroleum sector by the central and state governments is a multiple of the
combined fiscal subsidies and under-recoveries. So any price liberalisation must also address the issue
of oil sector taxation. The expert committee fails to do so. And while the report correctly argues that the
international price of a traded commodity such as oil and oil products should prevail, it completely ignores
that the taxes, which are domestically imposed, must reflect the purchasing power parity of the Indian
rupee.

If this is done, it will be seen that the Indian economy is burdened with one of the highest prices for oil and
oil products if not the highest. The Parikh committee wants to add to this burden. And, as we seem to be
increasingly taking cues from China on energy and environmental policies, let me advise the Parikh
committee that China does not burden its economy with energy taxes to the extent India does.

India has promoted a huge refining industry with a current capacity that exceeds domestic demand by
some 35 per cent. The report admits that value addition in refining is minimal with the raw material
(imported crude oil) accounting for over 90 per cent of the product price.

This refining capacity was created on the back of multiple subsidies disbursed selectively. Petroleum
products have emerged as India’s largest export in recent years. What we have been exporting is not
added value but the subsidies to the refiners funded by Indian taxpayers.

The report talks of taxing pre-NELP concessions and taxes on the windfall profits of ONGC. Then why not
also tax oil product exporters who made windfall profits by exporting the subsidies they received from
Indian taxpayers ? The Parikh committee actually rewards such refiners.

The report talks of limiting LPG subsidies to BPL households. The question is, how many BPL
households use LPG? In any event, do the economists on the Parikh committee truly believe that all APL
families in this country are so prosperous that they can do without subsidies?
The report talks of compensating higher diesel prices for the agriculture sector through higher support
prices. What about the small and marginal farmers who have no surplus to sell? Has the Parikh committee
not heard of farmers’ suicides even in Punjab – the granary of the country?

The report talks of electrification of BPL households when the truth is that about half the country’s
population has no electricity. So till we can learn to target subsidies, we will need to be more innovative
than to simply remove subsidies.

The Parikh committee report on pricing petroleum products should be rejected outright or debated openly
with all political parties and civil society at large. The integrated energy policy committee that Parikh also
chaired not so long ago made much bolder and much more meaningful recommendations on pricing of
petroleum products.

The latest Parikh committee does not propose “bold” reforms – it proposes bad reforms.

The writer is an energy expert.