INDIA BUSINESS WORLD - JUNE 2006
THE MONTH THAT WAS...

FUEL BILL TO BURN LARGER HOLE

   THE government has introduced trade parity pricing strategy for the retail petro sector, doing away with the import parity pricing regime that was put in place in April 2002. Prices of petrol and diesel have been increased by an average Rs 4 and 2 per litre respectively in accordance with the new pricing regime.

While the increase is the highest in Mumbai, where petrol will now sell for Rs 53.5 a litre (a hike of Rs 4.34 per litre) and diesel Rs 39.96 a litre (up Rs 2.39 a litre). Petrol will sell for Rs 47.51 per litre and diesel Rs 32.47 per litre in the Capital. Cooking gas (LPG) and kerosene for PDS have been spared. The revised prices are still way below the required changes as per the new pricing formula. It is estimated that petrol would be dearer by Rs 8.75 a litre and diesel by Rs 10 a litre if they were put on actual trade parity prices. But given the political pressure and sensitivity of the issue, the government took a calibrated step, albeit after a gap of eight months, to only pass on a modest hike to the consumers.

The new trade parity pricing regime is in line with the Rangarajan Committee report, which had recommended lowering of protection levels for refiners and a more transparent system to provide subsidies. Accordingly, the Cabinet decided to reduce Customs duties on petrol and diesel to 7.5% from 10%, thereby reducing the effective protection level for refineries. It may be noted that this will not any impact on revenue collections as India is now self sufficient in petrol and diesel. Slashing of duties will only reduce the cushion that the refinery companies enjoyed.

On its part the government has also taken a part of the huge losses incurred by the oil companies for keeping retail prices unchanged despite the spike in crude oil prices. Prices were last raised in September 2005 when crude prices were $59 a barrel against an average of $71 a barrel now. The government has decided to issue oil bonds of Rs 28,300 crore to the oilcos. These bonds, which are expected to be issued in equal quarterly instalments of Rs 7,000 crore, will be interest bearing and are likely to be issued on SLR basis.

The total package (government bonds, price hike, reduced Customs duty and trade parity) is expected to meet the deficit in the oil economy.

SOON after the government announced its decision to hike petrol and diesel prices, the Congress party sought a moderation in the price hike, report Our Bureaus from New Delhi . This makes a partial rollback of the announced steep price hikes inevitable, given the common opposition of all political parties, both within and outside the ruling coalition, to the move.

The party leadership, which discussed the government's decision to hike the prices of diesel and petrol, was of the view that the current pricing was politically imprudent. “The leadership discussed the issue,” party spokesman Rajiv Shukla said.

THE INTRODUCTION of the trade parity pricing regime in the petro-sector will evoke a mixed bag reaction from the oil bigwigs. While, refinery companies, particularly those with limited marketing networks like MRPL and Reliance will take the hardest knock on their bottomlines, integrated oilcos like IOC, HPCL, BPCL are expected to be better off.

The oil bond package is expected to bail out the oilcos but it may have been a little too late. First Quarter results may have a few surprises in store. While IOC is expected to sail through and post profits, thanks largely to the capital recovered from sale of ONGC shares, BPCL and HPCL may not be able to scrape through. Industry sources said that with the oil companies taking in huge losses for two months of this quarter, it may be difficult to wipe out all the losses. Moreover, the price hike is linked to an average crude price of $70 a barrel. Any upward increase in prices will only put pressure on retail prices.

The reduction of customs duty on petro products like petrol and diesel to 7.5% from 10%, while maintaining a 5% duty on crude has reduced the effective rate of protection on refineries. However, this will reduce the refinery gate prices which in turn will reduce the losses for the marketing companies as they will buy the products at a lower price from refiners.

The new trade parity policy is aimed at reducing some part of the notional costs added on in the import parity pricing regime. In the import parity pricing regime domestic oilcos added notional costs ie added costs like freight, insurance, customs duty etc, to the product price, to the retail price. But under trade parity the prices will take into account the export parity price ie the price at which the fuel is exported. For instance prices of petrol would need to be increased by Rs 10 per litre under the old import parity pricing formula if it were to be brought at par with international levels. However, petrol would need to be increased by Rs 8.75 under trade parity.

The new pricing package also tries to make in more transparency in the system by making provisions for oil bonds which is like a budgetary allocation for meeting the subsidy bill. This, however, may not augur well with the government's commitments on FRBM as it has been making efforts to cut back subsidies.

INDUSTRY chambers have termed the price hike for petrol and diesel as something that was inevitable. Leading industry bodies including CII and Assocham, who were looking forward to revision in domestic oil prices given the global run up in crude prices, indicated that the revision should also have addressed other petroleum products including LPG and kerosene.

CII president R Seshasayee said, “CII recognises that oil price hike had become inevitable. CII continues to recommend the reflection of international oil prices on a real time basis in the Indian market, after suitable alleviation through adjustment in taxes.” He added, “CII continues to urge the government to implement the recommendations of the Rangarajan Committee which comprehensively addresses the issue of petroleum products including kerosene and LPG.”

Assocham president, Anil Agarwal on his part, said that the hike had become essential in view of rising oil prices overseas. He added, “The government should have effected considerable hike in the prices of LPG. The government should ensure that the targeted subsidy on kerosene should not be misused for adulteration purposes.”