Petroleum minister Murli Deora on Wednesday said some recommendations of the BK Chaturvedi committee can be implemented while for some others it could be difficult to do so. Going by past record, what would seem tough to implement would be the alignment of domestic fuel prices to the market. With global prices softening, this is the time to discuss threadbare the economics of pump pricing. The fear is that the political economy hurdles would be tough to surmount.
Illustration: Jayachandran / Mint
The panel suggests a shift from setting the refiners’ selling price for oil marketing companies at a trade parity price that’s primarily based on the alternative cost, had the product been imported, to an export parity one where it is set equivalent to what exporting the product would get. It also wants that customs duty on products be reduced to zero from the current 2.5%. This means removal of protection to the dominating state-owned players.
Here’s how: First, the customs duty on import of products is higher than the nil duty on crude oil. This is a cushion for the refiner — he gets to earn more than just the international price of products. He also gets the equivalent of the customs duty that a notional import of product would attract. Eliminating customs duty on products will eliminate this protection. Second, export parity pricing would be calculated f.o.b. (free on board), not c.i.f. (with the cost of freight and insurance on imports). So refiners’ costs on the book will be lower. All this means their under-recoveries (difference between the controlled retail price and refiner’s book price) will be lower. So far so good, as the subsidy burden on the fisc and the oil bond-based future liabilities will decline. Besides, eliminating protection for refiners is a good idea.
Indeed. But only if market-based pricing is allowed. Let alone compensating for the spike in the price of oil, oil retailers are not allowed to build into the consumer price all the state-level taxes that they absorb. The existing protection offsets some of these. The committee is right to say that such state taxes should be allowed to be built into the pricing. This may not be easy to implement. And eliminating protection without compensating state-run refiners for those taxes will worsen their financial health. Unlike private refiners, who can export their product and escape this tyranny, they must meet domestic demand before exporting.
The outlook is not promising. In 2006, the Rangarajan report was implemented in parts. A piecemeal approach would just add another dimension to populism.
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