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Oil Subsidy Bill – is it really burden on Government 

Preface
Our Prime Minister has always been talking about reforms with a human face. But reforms took a back seat for most of the time in the present government. When it suddenly came to fore the human face was absent and everything of reforms translated to slapping price hikes on the common man’s face since reforms rolled out through a series of subsidy withdrawal measures.

Experts have been pointing out that the continued oil subsidies could raise India’s fiscal deficit well above its budgeted target of 5.1% of GDP but economic advisors a few months back pointed out that the country’s oil subsidy bill worth Rs 1.5 lakh crore could take the fiscal deficit beyond 6% in FY 13. A Standard & Poor and Fitch rating pointed out that the widening deficit has put India on the brink of losing investment grade and that swung our government into action – start increasing petro-product prices mainly of four essential products, namely, Petrol, Diesel, PDS (Public Distribution System) Kerosene and Stuffed Toys Domestic LPG.

India has adopted the global best practices in almost every case (even in cases of scams) but why not in the petroleum sector is not really understood. Suddenly after a deep fall of rupee when the government discovered that the oil subsidy bill could touch a whooping Rs.2 lakh crore it started deregulating prices of even Diesel, PDS Kerosene and Domestic LPG for domestic consumption illogically by adopting The Parikh Committee Report (Report of The Expert Group on A Viable and Sustainable System of Pricing of Petroleum Products, Government of India, New Delhi, 02 February 2010) as the basis for justifying the withdrawal of subsidies with reference to the unsustainable fiscal deficit. It will affect the common people at large specially the financially weaker sections of the society who become over-burdened with the increasing prices of all items of daily necessity.

It is astonishing that the government never gave a second thought to its price build-up formula for Petrol, Diesel, PDS Kerosene and Domestic LPG for domestic consumption and went forward to make corrections in the economy on the basis of notions as opposed to real costs.

Background Foundation
In this paper attempt has been made to clear the doubts in arriving at the actual prices of four essential petro-products namely Petrol, Diesel, PDS Kerosene and Domestic LPG for domestic consumption. The facts and figures as adumbrated below which give rise to the conclusion that the petroleum pricing policy as adopted by the Government and PSU Refineries are arbitrary, imaginary and notional. In order to counter the prevailing pricing policy the data published by Petroleum Planning & Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, Government of India; Challenges of Under Recoveries of Petroleum Products, Standing Committee on Petroleum and Natural Gas (2011-12), Ministry of Petroleum and Natural Gas, Government of India; The Rangarajan Committee Report (Report of the Committee of Pricing and Taxation of Petroleum Products, Government of India, New Delhi, February, 2006); The Parikh Committee Report (Report of The Expert Group on A Viable and Sustainable System of Pricing of Petroleum Products, Government of India, New Delhi, 02 February 2010); Profit & Loss (P&L) accounts, Balance Sheets and Price Build-up formulae published in websites of three Public Sector Undertaking (PSUs) namely; Indian Oil Corporation (IOC); Hindustan Petroleum Corporation Ltd (HPCL); and Bharat Petroleum Corporation Ltd (BPCL) and the contrary view taken in the paper titled ‘Petroleum Pricing Policy – a Viable Alternative’ – Dipankar Dasgupta & Tushar Kanti Chatterjee; Economic & Political Weekly; Vol XLVII No. 46; November 17, 2012 and an unpublished paper of Tushar Kanti Chatterjee have been considered and critically analyzed.   

Since published data for the financial year 2012-13 is not yet available, the data for the financial year 2011-12 has been used for an in-depth analysis and its actual impact on the prevailing pricing structure of four essential petro-products for domestic consumption particularly in reference to the ‘Central Subsidy’ and the ‘Under Recovery’ allocated by the government to three PSU Oil Refineries have been critically studied and the analytical results are presented here for further scrutiny of the stakeholders in the interest of the common people of the country .       

Price Build-up Estimation for Four essential Petro-Products for Domestic Uses
It is astonishing that the government never gave an in-depth analysis and its impact to its ‘Price Build-Up’ formulae for these four essential petro-products for domestic consumption and went forward to make corrections in their sales prices on the basis of ‘Notional and Imaginary’ figures as recommended by The Rangarajan Committee Report (Report of the Committee of Pricing and Taxation of Petroleum Products, Government of India, New Delhi, February, 2006). The price formulations of these four essential petro-products for domestic uses are primarily constituted of three types of prices namely, Trade Parity Price, Desired Price and Administered or Selling Price.         

  • Trade Parity Price

Adopting the recommendation of the Rangarajan Committee Report, the ‘Trade Parity Price’ of Petrol and Diesel are estimated by considering 80% of the ‘Import Parity Price’ and 20% of the ‘Export Parity Price’. However, ‘Trade Parity Price’ of PDS Kerosene and Domestic LPG are estimated by considering only 100% ‘Import Parity Price’ since the exports of Kerosene and LPG are negligible in comparison to their imports.      

The ‘import Parity Price’ of these four essential petro-products for domestic consumption are derived by assuming that hundred per cent of these products are imported at the prevailing international FOB (Free on Board) prices at Arab Gulf. Over and above, ocean freight on and average @ 1.5% on Petrol, Diesel and PDS Kerosene and @ 4.5% on LPG and port charges including insurances, ocean losses, LC charges and port dues on and average @ 1% respectively on FOB price of these four essential petro-products plus custom duty @2.58% including 3% Education cess on Petrol and Diesel and 0% custom duty on PDS Kerosene and Domestic LPG are added and converted to Rupee Value in unit of Rs./liter in case of Petrol, Diesel and PDS Kerosene and Rs./cylinder in case of LPG considering prevailing dollar to rupee parity.     

  • Desired Price

The ‘Refinery Gate Price’ in case of Petrol and Diesel are estimated by adding premium recovered for BS – IV grade over BS – III grade @ Rs.0.42 per liter and @ Rs.0.04 per liter respectively on ‘Refinery Transfer Price’. But in case of PDS Kerosene and Domestic LPG for domestic consumption ‘Refinery Gate Price’ are same as their ‘Refinery Transfer Price’. The ‘Desired Price’ of these four essential petro-products for domestic consumption are derived adding the following components on the ‘Refinery Gate Price’.

  1. Inland Freight and Delivery Charges;
  2. Marketing Cost of Oil Marketing Companies of three Public Sector Undertaking (PSUs)  namely; Indian Oil Corporation (IOC); Hindustan Petroleum Corporation Ltd (HPCL); Bharat Petroleum Corporation Ltd (BPCL);
  3. Marketing Margin of Oil Marketing Companies of IOC, HPCL & BPCL;
  4. Bottling Charges (Filling & Cylinder Cost) for Domestic LPG Cylinder.
  • Administered/Selling Price

The government fixes an ‘Administered Price’ much lower than the ‘Desired Price’ for Diesel, PDS Kerosene and Domestic LPG (Petrol being deregulated in 2010-11) for domestic consumption and this generates a gap described as ‘Under-Recovery’. This ‘Under Recovery’ claims to be the raison d’etre for oil sector subsidization.

The price charge to Dealer (Depot Price) is arrived at after deducing ‘Under-Recovery’ on Diesel, PDS Kerosene and Domestic LPG plus fixed subsidy by Central Government for PDS Kerosene @ Rs.0.82 per liter and for Domestic LPG @ Rs.22.58 per cylinder. In case of Petrol ‘Desired Price’ and ‘Depot Price’ shall be the same as there is no ‘Under-Recovery’ on Petrol.    

The average ‘Selling Price’ excluding VAT of these four essential petro-products for domestic consumption are arrived at adding Excise Duty and Dealer Commission on ‘Depot Price’.  

From the aforesaid analysis of ‘Price Build-up’ computation it is revealed that the basis of pricing of these four essential petro-products for domestic uses is dependent on mainly four assumptions:       

  1. PSU Refineries are not importing crude oil or producing various petro-products;
  2. These four essential petro-products for domestic consumption are 100% imported by the PSU Refineries at the prevailing FOB Arab Gulf prices;
  3. The PSU Refineries are only converting BS – III grades of imported Petrol and Diesel to BS – IV grades and filling of domestic LPG cylinders;
  4. The Oil Marketing Companies (OMCs) of the PSU Refineries were formed only to distribute and market these four essential petro-products for domestic uses.

The ‘Desired Price’ of these four essential petro-products for domestic uses are derived by loading all notional baseless pricing factors considering the above four assumptions in order to arrive at a much higher value than actual. The actual cost of production and selling prices of these four essential petro-products for domestic uses should have been derived by estimating the costs involved in manufacturing & refining and distributing & marketing of these four essential perto-products in domestic market by the PSU Refineries by feeding a mixture of domestically produced and imported crude oil in their refineries.

  • Under-Recovery & Central Subsidy

As claimed by the government the total ‘Under-Recovery’ paid by the government against Diesel, PDS Kerosene and Domestic LPG for domestic consumption and Central Government Subsidy paid against PDS Kerosene and Domestic LPG was Rs.138541 crores and Rs.3000 crores respectively in the financial year 2011-12 to the three PSU Oil Companies. Because Petrol was deregulated in   the year 2010–11, ‘Under-Recovery’ or ‘Subsidy’ on Petrol was withdrawn accordingly.

The consumption figures of these four essential petro-products for domestic uses published by the Petroleum Planning & Analysis Cell (PPAC) for the financial year 2011-12 and the consumption figures derived from the ‘Subsidy’ and the ‘Under-Recovery’ are not matching. In case of Diesel there is a discrepancy of 13124294382 lit considering average unit ‘Under-Recovery’ at Rs.8.93 per liter as estimated in Table – III above. But to match the ‘Under-Recovery’ figure of Rs.81192 crores, the average unit ‘Under-Recovery’ should be Rs.10.43 per liter which appears higher as the average FOB price of Diesel at Arab Gulf as reported in ‘The Challenges of Under Recoveries of Petroleum Products, Standing Committee on Petroleum and Natural Gas (2011-12)’ was US$122.04 per bbl. Thus, the consumption of Diesel should be 91016789553 lit instead of 77815024038 lit as reported by PPAC. Similarly, the consumption of PDS Kerosene should be 10654320988 lit instead of 10069999388 lit as reported by PPAC. In case LPG total consumption was 1082936620 cylinders, of which 946412755 cylinders were used for domestic and the balance 136523865 cylinders were used for auto, commercial and industrial purposes. However, if the Oil Ministry or PSU Refineries can provide the exact consumption figures for the financial year 2011-12, the estimates can accordingly be modified.                

The subsidies are normally in order when the cost of production is more than the final or sale price. But the idea of the said ‘Under Recovery’ here has no link with the cost of production. It is evident that the correction in the economy has been done on the basis of ‘Notion’. Furthermore, across the world price is set up on a cost plus basis and is brought under a tax cum subsidy framework. But in India the derived domestic prices of these four essential petro-products for domestic uses are set to recover the costs of imports that are too volatile.

The procedure adopted for deriving the ‘Desired Price’ is totally unacceptable in the interest of poor Indians since these four essential petro-products for domestic consumption are produced at home by Public Sectors Refineries located across the length and breadth of the country by using mixed crude of partly domestically produced and partly imported from Arab Gulf.

Additional Earnings of 3 PSU Refineries

  • Additional Earnings of 3 PSU Refineries from Notional Imports of Four Essential Petro-Products for Domestic Uses

The costs associated with ‘Notional and Imaginary’ imports of these four essential petro-products for domestic consumption should not be applied to these four essential final products which are produced from the mixed crude oil locally. But cost of imported crude oil consumed for producing these four essential petro-products for domestic uses and cost of the net imports of Kerosene and LPG consumed for the domestic uses should be considered. For reasons unknown   the Petroleum Ministry and Oil Marketing Companies have chosen to add the import costs including ocean freight & port charges, custom duty, quality up-gradation cost, distribution & delivery cost and marketing cost & margin of Oil Marketing Companies on these four essential petro-products for domestic consumption to arrive at their ‘Desired Price’.

The earnings of three PSUs Oil Companies (IOC, HPCL & BPCL) from notional imports towards ocean freight, port charges and custom duties of the said four essential petro-products for domestic consumption in the financial year 2011-12 was Rs.23687 crores. This figure is derived after deducting import quantity of Kerosene (69296296 liters) and LPG (358028169 cylinders) for domestic consumption, the import value of which was Rs.25560 crores.             

  • Additional Earnings of 3 PSU Refineries from Notional Price Loading on Quality Up-gradation, Distribution and Marketing of Four Essential Petro-Products for Domestic Uses

The earnings of three PSUs Oil Companies (IOC, HPCL & BOCL) from notional price loading towards premium recovered for BS –IV over BS – III grade, inland freight and delivery charges and marketing cost and margin of Oil Marketing Companies of three PSUs of Oil Companies (IOC, HPCL & BPCL) on these four essential petro-products for domestic consumption in the financial year 2011-12 was Rs.32422 crores.

Interestingly, in the ‘Price Build-up’ estimation the Oil Companies have added premium recovered for BS – IV grade over BS – III grade for Petrol and Diesel @ Rs.0.42 per liter and @ Rs.0.04 per liter respectively considering they are importing BS – III grade of Petrol and Diesel and converting to BS – IV grades in Indian Refineries. Similarly, other price components like inland freight and delivery charge and marketing cost & marketing margin of Oil Marketing Companies (OMCs) of three PSUs Oil Companies (IOC, HPCL & BPCL) are already loaded at the expenses of their profit & loss accounts and these charges on the basis of their unit costs can not be considered separately for arriving at their actual expenses. These expenses should be shared proportionately between quantities of these four essential petro-products consumed in the domestic market and other petro-products produced for partly domestic and partly export market in the PSU Refineries.    

  • Extra Earnings of 3 PSU Refineries from Domestic LPG Cylinder Cost

Similarly, in the ‘Price Build-up’ estimation of LPG cylinder, filling and cylinder costs are separately added over and above of notional price building on LPG cylinder as shown in Table – II above. This cost should also have already been taken in the expenses of profit & loss accounts of three PSU Oil Companies and these charges can not be taken separately. The earning from LPG cylinder filling and cylinder costs in the financial year 2011-12 was Rs.3661 crores. In fact, all the LPG consumers deposit security against LPG cylinder (currently @ Rs.2650 per cylinder and regulator) for which they are not getting any interest. How then PSU Refineries can add extra bottling cost in their Domestic LPG price formulation.

  • Total Extra Earnings of 3 PSU Refineries from Notional Pricing Formulae

It is evident from the above pricing structure analysis that the present pricing method of estimation of these four essential petro-products for domestic consumption as suggested by the Rangarajan Committee is notional and loading unnecessary financial burden on the consumers to extract more revenues (Rs.59790 crores) affecting severely poor Indians and causing unwanted inflation and huge price escalation in all type of commodities and imbalance in economy by widening fiscal deficit gap.

In order to evaluate the ACTUAL impact on the prevailing pricing scheme of these four essential petro-products for domestic consumption, actual consumption of imported and indigenous crude and their landed prices and duties, actual consumption of these four essential products for domestic consumption and their sales realization, actual landed value of imported part of PDS Kerosene and Domestic LPG,  refinery expenses of three PSUs for producing these four essential petro-products for domestic consumption, actual additional earnings of three PSUs on importing these four essential petro-products and excise duty and dealer commission on these four essential petro-products for domestic consumption shall be taken into consideration.

Impact of Cost of Mixed Crude
In the financial year 2011-12 the Indian refineries produced 203994000 MT of petro-products, comprising of various type and quantities of Petrol, Diesel, Kerosene, LPG, Naphtha, Aviation Turbine Fuel (ATF), LDO, Lube Oils, Furnace Oil, LSHS, Bitumen, Asphalt, and many other exported petro-products; of which actual production of these four essential petro-products for domestic uses was 107216208 MT (Petrol - 14992500 MT, Diesel - 75725969 MT, PDS Kerosene - 8142178 MT and Domestic LPG - 8355061 MT) or 52.56% of total production of petro-products. The production figure of 107216208 MT of the said four essential petro-products for domestic uses was obtained after deducting the imports of 564000 MT of kerosene and 5084000 MT of LPG from the actual consumption of 112864208 MT of these four essential petro-products for domestic uses. As per PPAC’s calculation the consumption of these four essential petro-products for domestic uses was 103341000 MT which appears lower than actual as explained in Table – IV above. Thus, the production of other petro-products like Naphtha, Aviation Turbine Fuel (ATF), LDO, Lube Oils, Furnace Oil, LSHS, Bitumen, Asphalt, and many other exported petro-products including Petrol, Diesel, Kerosene and LPG were 203994000 MT - 107216208 MT = 96777792 MT or 47.44% of total production of petro-products.

 

For estimating the landed cost of crude for producing these four essential petro-products for domestic uses it is logical to presume that total indigenous crude produced should be 100% used for producing these four essential petro-products and only balance quantity of imported crude should be mixed with indigenous crude because of no impact on domestic prices due to dollar fluctuation. Other petro-products like like Naphtha, Aviation Turbine Fuel (ATF), LDO, Lube Oils, Furnace Oil, LSHS, Bitumen, Asphalt, and many other exported petro-products including Petrol, Diesel, Kerosene and LPG were presumed to be produced using 100% imported crude oil as they are sold at market driven prices.

In the financial year 2011-12 India’s total crude consumption in oil refineries was 209744375 MT, of which 171729000 MT was imported and the rest 38015375 MT domestically obtained. The total crude consumed for producing 107216208 MT of four essential petro-products for domestic uses as estimated above was 110238520 MT or 808048351 bbl (1 MT = 7.3 bbl) considering standard losses at 2.74%. As explained above, a total quantity of 38015375 MT crude oil produced domestically shall presume 100% of it to be used for the production of these four essential petro-products for domestic uses and balance quantity of 72223145 MT of crude shall be met by imports. Thus, the ratio of import to domestic crude for producing these four essential petro-products for domestic uses shall be at 66:34 whereas actual imports of total crude consumed for producing all types of petro-products including their exports was 82%.


The average FOB (Freight on Board) price of imported crude oil was US$110.97 per bbl during the financial year 2011-12 and its landed cost was US$ 113.75 per bbl taking 1.5% on FOB price towards ocean freight and 1% on CIF (Cost including Freight) price towards port charges covering insurance, ocean loss, LC charge and port dues. But landed price of domestically produced crude oil was US$ 87.21 per bbl (Rs.30614 per MT). The landed price of mixed crude based on 66% imported crude and 34% domestically produced crude oil as explained in Table – IX below was Rs.5009 per bbl considering average rupee to dollar conversion rate at 47.89 in the financial year 2011-12. Thus, actual cost of mixed crude of 808048351 bbl with 66% imported crude and 34% domestically produced crude shall be Rs.404761 crores without considering any Cess or duties on crude.

Central Government Earnings from Four Essential Petro-Products for Domestic Uses
In the financial year 2011-12 the total Excise Duty earned @ Rs.14.78 per liter on Petrol and @ Rs.2.06 per liter on Diesel inclusive of education cess was Rs.49540 crores. The dealer commission rates were Rs.1.5 per liter for Petrol, Rs.0.91 for Diesel, Rs.1.13 per liter for Kerosene and Rs.25.83 per cylinder for LPG and total dealer commission paid was Rs.15056 crores. The total Cess earned @ Rs.2500 per MT from domestic crude was Rs.9504 crores and NCCD (National Calamity Contingent Duty) earned @ Rs.50 per MT from imported and domestic crude was Rs.551 crores. Thus, total government earnings from the Cess and duties were Rs.59595 crores.

Profitability Calculation for producing Four Essential Petro-Products for Domestic Uses
For profitability estimation, in addition to landed mixed crude price, Cess & NCCD on imported and domestically produced crude, dealer commission, excise duty and other expenses such as percentage of operating expenses, interest and profit shared by three PSU refineries for producing these four essential petro-products for domestic uses, import costs of imported Kerosene and LPG consumed for domestic uses and average selling prices of the said four essential petro-products for domestic uses in the financial year 2011-12 shall be worked out.

  • Operating Expenses and Profit of 3 PSU Refineries

The combined operating expenses of three PSU Refineries in the financial year 2011-12 was Rs.48520 crores inclusive of Power & Fuel Cost (Rs.5440 crores), Employee Cost (Rs.8824 crores), Other Manufacturing Expenses (Rs.2560 crores), Selling & Admin Expenses (Rs.7576 crores) and Miscellaneous Expenses (Rs.24120 crores). The Combined Interest (Rs.9529 crores) and Depreciation (Rs.8466 crores) paid was Rs.17995 crores and combined net profit earned was Rs.6177 crores.

. It is understandable that operating expenses also include inland freight and delivery charges, bottling cost, and marketing cost & margin of these four essential petro-products consumed in the domestic market. Thus, the share of 52.56% of the combined operating expenses was Rs.25501 crores and that of Interest (Rs.5008 crores) & Depreciation (Rs.4449 crores) was Rs.9458 crores. Similarly, the share of profit was Rs.3247 crores.               

  • Sales Realization from selling Four Essential Petro-Products

The average unit selling prices inclusive of excise duty and dealer commission but excluding VAT during the financial year 2011-12 for the said four essential petro-products – Petrol, Diesel, PDS Kerosene and Domestic LPG for domestic consumption:

Petrol – Rs.55.77 per liter (deregulated); Diesel – Rs.35.65 per liter (partially deregulated); PDS Kerosene – Rs.13.65 per liter (regulated) and Domestic LPG – Rs.387.26 per cylinder (regulated).

The revenue earning from selling of these four essential petro-products – Petrol, Diesel, PDS Kerosene and Domestic LPG for domestic consumption in the financial year 2011-12 were Rs.491846 crores based on their average unit selling prices excluding VAT.        

  • Net Surplus Estimation for producing Four Essential Petro-Products for Domestic Uses

The gross average surplus from the selling of these four essential petro-products for domestic consumption in the financial year 2011-12 was Rs.87057 crores and this figure was arrived at after deducting landed crude cost of Rs. 404789 crores for producing these four essential petro-products for domestic uses from the average revenue earning of Rs.491846 crores from selling of these four essential petro-products in the domestic market. The net average surplus from the selling of these four essential petro-products for domestic consumption in the financial year 2011-12 was Rs.14903 crores. This figure was arrived at after deducting import cost (Rs.25560 crores) of Kerosene and LPG for domestic uses, shared operating expenses (Rs.25501 crores) and interest and depreciation (Rs.9457 crores) of three PSU refineries, Dealer Commission (Rs.15056 crores), Excise Duty (Rs.49540 crores) and Cess (Rs.9504 crores) and NCCD  (Rs.551 crores) on crude oil and adding shared net profit earned (Rs.3247 crores) by three PSU refineries, earning (Rs.23687 crores) from notional imports of these four essential petro-products in domestic uses, earning (Rs.32422 crores) from notional price loading factors on these four essential petro-products in domestic uses and earning (Rs. 3188 crores) from price loading on bottling charges from the average gross surplus of Rs.87057 crores estimated above. 

Alternate Proposal for Cross-subsidized Pricing Scheme for selling four Essential Petro-Products for Domestic Uses
The Refineries can further increase their profit if a cross-subsidized administered pricing scheme for petrol, diesel, kerosene and domestic LPG is adopted. In addition, variable VAT rates in states may be replaced with a fixed amount of cess in order to bring about uniformity in the prices of the four products across the country and cess not contributing to price escalation. The suggested prices, Cess and the motivations underlying them are described below.

The suggested fixed Cess may be considered at Rs.10 per liter of petrol, Rs.10 per liter of unsubsidized diesel, Rs.3 per liter of subsidized Diesel, Re.1 per liter of subsidized PDS Kerosene, Rs.10 per liter of unsubsidized Kerosene and Rs.100 per cylinder for unsubsidized LPG.

  1. Petrol:  Petrol is largely an item of final consumption. Its price has little impact on inflation through forward linkages. Also, it is mostly consumed by the relatively affluent sections and need not be subsidized. Thus, the retail price of Petrol across the country is fixed at Rs.60 per liter which is lower than the average desired price including Excise Duty, Dealer Commission and fixed Cess at Rs.10/- per liter during the financial year 2011-12 (Rs.66.92 per liter in Delhi).   
  1. Diesel:  According to the Parikh Committee Report the approximate consumption pattern of Diesel in India was: Railways -- 6 per cent; trucks --37 per cent; buses -- 13 per cent; taxis -- 8 per cent; agriculture -- 12 per cent; industry --10 per cent; power generation -- 8 per cent; and private cars -- 6 per cent. Thus, the Diesel consumption for railways, trucks, buses, taxies, power generation and agriculture accounts for about 84 per cent of the total consumption, while that for industry and private cars constitutes the balance of 16 per cent. In other words, 84 per cent of the Diesel consumed is critical in nature and needs to be subsidized. With this consideration in mind, a Diesel price for critical use is suggested to be Rs.38 per liter including excise duty, dealer commission and fixed Cess at Rs.3/- per liter. For the remaining 16 per cent of Diesel use, the retail price is fixed at Rs.60 per liter including excise duty, dealer commission and fixed Cess at Rs.10/- per liter, which matches the suggested price for Petrol.  

A differential pricing formula for Diesel may be implemented through the much discussed direct cash transfer procedure. Every truck, taxi, bus and tractor should have a unique number assigned through RFID (Radio-frequency Identification) chips, as are available for the latest vehicles. The Petrol Pumps will scan the unique number for generating retail shop bills and sell Diesel at the same price of Rs.60 per liter to all consumers. However, the drivers/owners of transport vehicles and tractors will receive a subsidy of Rs. (60 - 38) = Rs.22 per liter per month against the deposit of original bills to designated authorities. Similarly, farmers may be allowed to use a maximum of 15 liters of Diesel for each bigha watered by Diesel Pumps, receiving thereby a subsidy of Rs.(60 - 38) = Rs.22 per liter per bigha. However, monitoring of diesel consumption by Railways and power generation units are easy.

  1. Kerosene: The Parikh Committee finds that 35 per cent or more of PDS Kerosene is diverted to take advantage of higher market prices. To minimize such leakages a single price of Kerosene at Rs.50 per liter inclusive of cess at Rs.10 per liter is suggested in the market like in the case of Diesel. The subsidized price of PDS Kerosene with dealer commission and fixed Cess at Re.1 per liter would be Rs.14.65 per liter for 65 per cent of total Kerosene consumption. As with Diesel, ration shops could sell it at a uniform price of Rs.50 per liter. The Ration/BPL/Aadhaar card holders would need to open bank accounts in nearby nationalized banks. Under this arrangement, they would receive direct bank transfers of Rs. (50–14.65) = Rs.36.35 per liter of Kerosene purchased every month. In the absence of branches within a 3 km radius, the Panchayat would be assigned the responsibility of distributing cash subsidy to the villagers and submit the accounts to concerned authority. This should reduce some, though not all; malpractice and lower PDS Kerosene purchase to one third the observed levels.
  1. LPG: The Parikh Committee observes that rural households use 6 to 9 cylinders per year (since they also use wood as alternate fuel), whereas urban and semi-urban households use 9 to 20 cylinders per year, with lower income groups using PDS kerosene as substitute fuel for cooking.  

There is a clear need to restrict the availability of subsidized LPG to households. However, according to the Parikh Committee, average urban households consume around 14 cylinders annually, whereas many rural households consume 9 cylinders per year. Keeping this in mind, the supply of subsidized domestic LPG could be rationed to one cylinder per month (i.e. 30 days) for each household (instead of the 9 cylinders per year norm proposed by the government recently). Further it is assumed that around 10 per cent of the population will consume more than 1 cylinder per month (30 days).

The unsubsidized domestic LPG could be priced Rs.900 per cylinder inclusive of cess at Rs.100 per cylinder (operative for a second cylinder purchased within 30 days of the last purchase). The subsidized price is assumed to be Rs.400 per cylinder. Also, as decided by the government recently, a common data base of subscribers would locate families with multiple LPG connections and their extra connections will then be locked.

Following the similar computation as carried out in the ‘Profitability Calculation’ for producing four essential petro-products for domestic uses above, for a proposed cross-subsidized pricing scheme, the gross average surplus from the proposed cross-subsidized pricing scheme of these four essential petro-products for domestic consumption in the financial year 2011-12 would be Rs.169485 crores. The net average surplus from the proposed cross-subsidized pricing scheme of these four essential petro-products in domestic market in the financial year 2011-12 would be Rs.33632 crores and this figure is arrived at after deducting all the financial component figures described in ‘Profitability Calculation’ above and also deducting total cess of Rs.63699 crores earned by the states from the proposed cross-subsidized pricing scheme and adding earnings from notional imports, price loading factors and shared net profits earned by three PSU refineries.

Actual Savings of 3 PSU Refineries from Four Essential Petro-Products for Domestic Uses

It is ample clear from the above analysis that the PSU Oil Refineries have made significant net profit of Rs.14903 crores in the financial year 2011-12 based on average desired prices from selling of these four essential petro-products for domestic uses. It means PSU Oil Refineries should have maintained their financial viability without taking any ‘Central Subsidy’ (Rs.3000 crores) and or ‘Under Recovery’ (Rs.138541 crores) as claimed in Table – IV above from the government. In fact, the actual savings of the PSU Refineries from selling of only the said four essential petro-products for domestic uses in the financial year 2011-12 was Rs.156444 crores. This saving would further increase to Rs.175173 crores if proposed cross-subsidized pricing scheme suggested above is adopted. The question is that how this huge of amount of money (Rs.156444 crores) was spent by the PSU Refineries.

Earning from Exporting of Four Essential Petro-Products

Besides net profit (Rs.14903 crores) from selling of these four essential petro-products for domestic uses by the PSU Oil Refineries, the Indian Refineries are making huge profits from selling of petro-products in domestic as well as export markets at market driven prices. As for example net imports of PDS Kerosene and LPG were 530083 MT and 4910041 MT respectively and net exports of Petrol and Diesel were 13869722 MT and 19355751 MT respectively during the financial year 2011-12. Net export earning of the Indian Refineries was Rs.145886 crores by net exporting 27785350 MT. If minimum net profit @ 5% on exporting these four essential petro-products was considered, the additional profit of Indian Refineries from exporting only Petrol, Diesel, Kerosene and LPG would be Rs.7294 crores. Furthermore, Indian Refineries do make substantial profits from selling of other petro-products in both domestic and export market.               

 

Merger of 3 PSU Refineries – A Cost Saving Measure

As far as cost saving measures are concerned a merger of the PSU Refineries and their Oil Marketing Companies (OMCs) can be mulled to reap a minimum saving of Rs.10,000 crores by cutting down expenses on excess man-power, particularly at the executive level (IOC maintains a highly uncompetitive executive to workmen ratio of 1:1.35), as well as operating, capital and overhead expenditures. It is expected another 5-10% possible reduction at least in prices of the said four essential petro-products for domestic consumption if there is proper cost control measures being taken after merging of the PSU Refineries. The government must see that people don’t end up paying for inefficiency and there lies the true spirit of reforms.

Total Earnings of Central, State and 3 PSU Refineries from Four Essential Petro-Products for Domestic Consumption

That on computation of total earnings of central & state governments and the PSU refineries from selling of only the said four essential petro-products for domestic uses was Rs.301767 crores in the financial year 2011-12. This earning would have further increased to Rs.319122 crores if proposed cross-subsidized pricing scheme suggested above was adopted.

Remarks

Since the present exercise is based on average pricing of Crude, Petrol, Diesel, Kerosene and LPG during the financial year 2011-12, the similar exercise needs to be repeated for the current financial year (2012-13) to verify these relationships. To protect the poor, such price changes should be accommodated through upward revisions in the price of Petrol, unsubsidized Diesel (16 per cent) and unsubsidized LPG (10%) as far as possible. Every 15 days these values should be monitored, and accordingly, the price of Petrol, unsubsidized Diesel and unsubsidized LPG shall be adjusted taking into consideration the fluctuation of landed price of imported crude. In other words, the prices suggested should not be treated as rigid in nature. Depending on circumstances, they will have to change.

The analysis indicates then that there is ample scope for generating surplus revenue by adopting suitable pricing policy without allocating any subsidies. It is doubtful therefore that there is no way of reducing the government’s fiscal deficit except through the recently adopted policy of removal of subsidies for the under-privileged masses.

From the above fact finding exercise it is evident that this will raise seriously question the wisdom of the government behind the recently promulgated pricing policy for Petrol, Diesel and Domestic LPG. Thus, this exercise clearly points out that the government had not looked into enough alternatives before announcing the latest policies. The matter calls for serious debate amongst all stakeholders including policy makers, technologists and economists.