India Energy Conference 2008 India Energy Conference 2008

Session 4 - Product Pricing & SubsidiesSession 4 - Product Pricing & Subsidies

Ruchika ChawlaRuchika ChawlaAssociate FellowAssociate Fellow

3-4 October 20083-4 October 2008

Multiple Objectives of Pricing Multiple Objectives of Pricing System System

Providing adequate incentive to oil companies

Providing resources for the government

Promoting efficient consumption choices

Minimising impact on

consumers

Petroleum Pricing HistoryPetroleum Pricing History

APM Pricing System(1975-1998)

Dismantling of APM(1998-2002)

Post APM dismantling (2002-present)

Dismantling of APM proposed…Dismantling of APM proposed…

Prices of all petroleum products except MS, HSD, ATF, Prices of all petroleum products except MS, HSD, ATF,

PDS Kerosene, Domestic LPG to be de-controlled (April PDS Kerosene, Domestic LPG to be de-controlled (April

1998)1998)

Pricing of MS & HSD to be de-controlled (April 2002)Pricing of MS & HSD to be de-controlled (April 2002)

There was fortnightly revision of the MS & HSD prices by There was fortnightly revision of the MS & HSD prices by

the OMCs in consultation with the GoI the OMCs in consultation with the GoI

Subsidy on PDS Kerosene and Domestic LPG to be Subsidy on PDS Kerosene and Domestic LPG to be

reducedreduced

Post Dismantling of APM: Post Dismantling of APM: the Current Situation the Current Situation

ProposalProposal Implementation Implementation Status Status

Prices of all petroleum products except Prices of all petroleum products except MS, HSD, ATF, PDS Kerosene, MS, HSD, ATF, PDS Kerosene, Domestic LPG to be de-controlledDomestic LPG to be de-controlled

Pricing of MS & HSD to be de-Pricing of MS & HSD to be de-controlledcontrolled

XX

There was fortnightly revision of the There was fortnightly revision of the MS/HSD prices by the OMCs in MS/HSD prices by the OMCs in consultation with the GoIconsultation with the GoI

XX

Subsidy on PDS Kerosene and Subsidy on PDS Kerosene and Domestic LPG to be gradually reducedDomestic LPG to be gradually reduced

/ X/ X

Inadequate Price Increases…Inadequate Price Increases…

1% increase

23-30% increase

150% increase

180% increase

100%

120%

140%

160%

180%

200%

220%

240%

260%

280%

300%

2004 2005 2006 2007 2008Year

%

Brent Crude Indian Crude basket PetrolDiesel Kerosene LPG

Source: IOCL website

Inadequate and ad-hoc price revisions

Impact on Indian Economy Impact on Indian Economy High costs of inaction High costs of inaction – Trebling of under recoveries from Rs 20146 crores to Rs 77123 Trebling of under recoveries from Rs 20146 crores to Rs 77123

crores in 3 yearscrores in 3 years– Under recoveries of oil companies 51% of fiscal deficitUnder recoveries of oil companies 51% of fiscal deficit

Government committed to reduce its gross fiscal deficit Government committed to reduce its gross fiscal deficit to 3 % of GDP by 2009to 3 % of GDP by 2009– Current GFD 4% of GDP (2007-08)Current GFD 4% of GDP (2007-08)

Total oil subsidies are already estimated as hovering Total oil subsidies are already estimated as hovering around 2-3% of GDP with oil prices at about 80$/bbl!around 2-3% of GDP with oil prices at about 80$/bbl!– 90-95% unaccounted for in budget - borne by oil companies as 90-95% unaccounted for in budget - borne by oil companies as

under-recoveriesunder-recoveries

GFD adjusted with under-recoveries – 6% of GDP!!GFD adjusted with under-recoveries – 6% of GDP!!

Sources: Petroleum Planning and Analysis Cell and the Reserve bank of India

Impact on Oil CompaniesImpact on Oil Companies

OMCs incurring losses OMCs incurring losses of Rs.400 crore/day onof Rs.400 crore/day on sale sale

of petrol, diesel, Kerosene & LPG*of petrol, diesel, Kerosene & LPG*– Per unit under-recovery*Per unit under-recovery*

Diesel - Rs.13.69/litre Diesel - Rs.13.69/litre

Petrol - Rs 6.31/litrePetrol - Rs 6.31/litre

PDS Kerosene - Rs 31.39/ litrePDS Kerosene - Rs 31.39/ litre

LPG cylinder - Rs 312.58/ cylinder LPG cylinder - Rs 312.58/ cylinder

Increasing exposure to debt for the oil companiesIncreasing exposure to debt for the oil companies

Crowding out private sector participationCrowding out private sector participation

•- based on average price for second fortnight of August 2008•Source: Economic times (31st August 2008)

Impact of Lopsided Pricing Impact of Lopsided Pricing

Increased market distortionsIncreased market distortionsAt high crude oil prices, subsidized diesel At high crude oil prices, subsidized diesel cheaper than FO pricescheaper than FO prices– Industries and power plants shifting from FO Industries and power plants shifting from FO

to dieselto diesel– Increased demand for diesel Increased demand for diesel Increasing Increasing

imports for diesel imports for diesel increased pressure on increased pressure on OMCsOMCs

Sub optimal utilization of petroleum products

MS – HSD pricing MS – HSD pricing

High incidence of taxation in High incidence of taxation in

the MS and HSD pricing the MS and HSD pricing

– 45% in the petrol retail price 45% in the petrol retail price

– 25% in the diesel retail price25% in the diesel retail price

Steady movement from ad-Steady movement from ad-

valorem to specific duties valorem to specific duties

Sources: Petroleum Planning and Analysis Cell, Reserve Bank of India

Particular

Revenue from petroleum sector (2006-07)

Total govt revenue % share

Customs 10043 86327.24 11.63%

Excise Duty 58821 117612.76 50.01%

Corporation Tax 12153 144318.3 8.42%

Total Tax Revenue 81017 353182.27 22.94%

Total revenue to centre from pet sector 93802 658240.25 14.25%

Decreasing share of budgetary Decreasing share of budgetary subsidies …. subsidies ….

17842

2463028584

34625

2447 2496 2541 27000

5000

10000

15000

20000

25000

30000

35000

40000

2004-05 2005-06 2006-07 2007-08

Year

Rs

Cro

re

Under recoveries Budgetary subsidies

94% increase in under – recoveries Only 10% increase in budgetary subsidies

Source: PPAC and Basic Statistics (MoPNG)

Kerosene and LPG Subsidies Kerosene and LPG Subsidies

KeroseneKerosene– Subsidized kerosene siphoned off to adulterate dieselSubsidized kerosene siphoned off to adulterate diesel

– Less than 2% of rural households use kerosene for Less than 2% of rural households use kerosene for cookingcooking

– 55% rural households use for lighting but is an 55% rural households use for lighting but is an inefficient source of lighting inefficient source of lighting

LPG LPG – 76% subsidy goes to urban areas76% subsidy goes to urban areas

– 40% of subsidy enjoyed by top 6.75% total population40% of subsidy enjoyed by top 6.75% total population

Source: TERI Publication ‘Petroleum pricing in India: Balancing equity and efficiency, November 2005,

ChallengesChallenges

Need to move away from ad-hoc price Need to move away from ad-hoc price

revisionsrevisions

Need to move to full cost pricing at the Need to move to full cost pricing at the earliestearliest

Need to adopt targeted subsidy delivery Need to adopt targeted subsidy delivery

mechanism mechanism

Thank You Thank You