Trade parity best option, 80:20 method ad hoc: Parikh

Tuesday, October 6, 2015

11:02 PM

suggested a pricing mechanism benchmarked to export parity pricing (EPP) to cut

governments subsidy burden.

Parikh opines that if a product is imported substantially then import parity price should prevail
and vice versa.
Currently, diesel is priced at trade parity of which 80 per cent is import price and 20 per cent
export rate. Kerosene and LPG are priced at import parity (import price plus duties and
transportation).

Finance Ministry has pushed for refiners to be paid the equivalent of rates they would have
realised if diesel, kerosene and LPG were exported
The Finance Ministry wanted export parity pricing for diesel and kerosene in 2012-13 and
wanted LPG to be priced through a 60-40 mix of export and import parity rates.

suggested that we should have trade parity price. The idea is that if you are exporting a
product significantly, then the producers opportunity cost is what he can earn from an export
price, so the domestic price should be an export price.
On the other hand, if you are importing a product substantially then the consumers
opportunity cost is the import cost. Therefore in a competitive market, you would see that in
such a case, import price would prevail in the market and in the earlier case it would be an
export price. That we consider as a trade parity price - depending on the direction of your
trade, you would set the price in domestic market.

Here, the question is for a country as a whole, we are significantly exporting some of the oil
products. Therefore, they should be worked out with a base of an export parity price. Of
course, there are questions that this is true only in a competitive market and we do not have a
competitive setup. We have on the one hand public sector companies, which are asked to
follow a certain kind of procedures and investment which are affected by the considerations of
geographical equity and development in different states and so on. On the other hand there
are private sector companies, which get certain tax advantages which a public sector company
doesnt get.

Q: What is the current method of pricing? Is it rate parity and that involves how much of
import and export?
A: The current method of pricing is what is called trade parity, but it is not strictly trade parity
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A: The current method of pricing is what is called trade parity, but it is not strictly trade parity
in the sense in which I described. It is trade parity in the sense that it takes a weighted average
price, 20 percent export price and 80 percent import price. So it takes import parity and export
parity and weighs in the proportion of 20:80 and that is considered the trade parity price
today. That is a kind of a trade parity price, but not exactly the kind of a trade parity price that I
would expect would prevail in a competitive setup.

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