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Petro pricing inappropriate: Survey

The survey says non-resolution of subsidies in cooking gas and kerosene was 'floundering' reforms in the sector.

india Updated: Feb 27, 2006 14:46 IST

Criticising lack of "appropriate" pricing of petroleum products, the pre-Budget Economic Survey on Mondaywarned that the current practice of not passing on cost of production to consumers will have serious consequences and said non-resolution of subsidies in cooking gas and kerosene was 'floundering' reforms in the sector.

"With medium-term prospects of crude prices remaining high, the continuance of incomplete pass-throughs is not sustainable without serious consequences to the financial health of oil companies and the exchequer," the Survey warned and said management of the crisis needed bold response.

Despite hiking petrol price by Rs 5.50 a litre and diesel by Rs 4 per litre in two instalments in 2005-06, oil firms continue to sell the two auto fuels below the cost price. Oil firms are losing Rs 171 on sale of every cylinder of domestic LPG and Rs 12.96 on sale of every litre of kerosene through PDS.

"The movement towards market-determined pricing in hydrocarbon sector has floundered, pending the resolution of the issue of subsidy in domestic LPG and PDS kerosene," the Survey, tabled in Parliament, said.

Besides, the perverse incentives for fuel switching and distortions arising from differential tax rates need to be addressed. "The management of the lingering oil crisis requires rapid and bold policy response with a firm resolve."

The Survey, which is supposed to be a reflection of future government policies, stated that customs and excise on petroleum products constitute about 40 per cent of the total customs/excise collections of the government. "With an equally high sales tax, ranging from 12 per cent to 38 per cent, the tax component of the retail price of petrol and diesel remains high."

The high taxation "has been further compounded by the duty differential across products, including on the basis of end-use, leading to problems of fuel-switching and other malpractices," the Survey said, pointing to rampant adulteration of auto fuel with subsidised kerosene.

A committee on pricing and taxation of petroleum products headed by C Rangarajan had recently submitted its recommendations for a new mechanism of pricing that promotes efficiency of the hydrocarbon sector on the one hand, the concerns of maintaining affordability in prices of cooking fuel for consumers on the other, the Survey said.

It has suggested liberalising controls on fuel pricing and sought an immediate Rs 75 a cylinder increase in LPG price and restricting sale of subsidised kerosene to only Below Poverty Line (BPL) families.

On pricing of petrol and diesel, the Committee has suggested moving towards trade parity pricing from the current policy of pricing the fuel at imported cost.

The Survey said the average price of basket of crude oil imported by Indian refiners increased by 44.5 per cent from $37.3 per barrel in April-November 2004 to $53.9 per barrel in April-November 2005.

As a consequence of hardening crude prices, petrol and diesel prices were raised on June 21 and September 7, 2005.

"While retail prices of kerosene canalised through the public distribution system (PDS), and domestic LPG were kept unchanged for softening the burden on consumers, the incomplete pass through, however, entailed adverse implications both for the finances of domestic oil marketing companies and for the exchequer because of the issue of oil bonds' (to meet the losses of the two cooking fuel)," it said.

Kerosene prices have remained unchanged since April 1, 2002 despite the unprecedented increase in acquisition cost of crude and costs of refining.

"Spiralling international petroleum prices not only create a pressure on budgetary resources directly and indirectly through losses of oil PSUs, but also have a debilitating effect on the performance of the industrial sector as a whole," the Survey pointed out.

"In the context of public finance, appropriate pricing of petroleum products assumes significance, particularly with the petroleum marketing sector dominated by public sector oil companies," it said.

The rise in crude oil prices results in an initial fall in aggregate demand owing to a transfer of income from oil consumers to oil producers, who tend to have a lower propensity to consume than the former.

It also results in a supply-side effect reflecting higher production costs and lower profit margins.