Macro Economics and Business Policy

7/26/2019 Macro Economics and Business Policy

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MACRO ECONOMICS AND BUSINESS POLICY

PROJECT

ON

DE- REGULATION OF FUEL PRICES BY GOVERNMENT

(ANALYSIS OF ARTICLES)

SUBMITTED TO: SUBMITTED BY:

PROF. SHRIRAM PURANKAR VAIBHAV KUMAR YADAV- 14609099

JAYPEE BUSINESS SCHOOL SHUBHAM GUPTA- 14609082

ROHIT AGARWAL- 14609072

SHUBHANGI MITTAL- 14609085

SRIDEVI AGARWAL- 14609139

SIMRAN ARNEJA- 14609085

MANU MISHRA- 14609104


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INTRODUCTION

In Our modern day lifestyle, fuel prices play a crucial role and a slightest

rise, in these prices is a subject of big hue and cry for the masses. As a group ofseven students, we have therefore chosen such vital topic for the analysis

The topic DE- REGULATION OF FUEL PRICES BY GOVERNMENThas been chosen in the wake of recent change in government policies pertaining tothe same. The articles cover the various aspects of the new policy like explanation,causes and impact.

The articles include the details of the older policies of previousgovernments, to review fuel prices every fortnight. It emphasizes on the reasons as

to why fuel prices need to be revised and impact of international as well as politicalenvironment on domestic fuel market. These Articles put light on adverse impactof subsidies on exchequer, and suggest ways out of such adversities.


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ARTICLE 1:

Right pricing petrol & diesel

Dated: October 27, 2014RAGHUVIR SRINIVASAN

Oil companies should price their products according to their own cost structures

Fuel pricing has been the bugbear of many a government in India. Thoughde-licensing of oil refining and marketing, and decontrol of products such asnaphtha, fuel oil, lubricants and aviation turbine fuel were one of the firstaccomplishments of the reform process in the early 1990s, freeing the pricing fortransportation fuelspetrol and dieselremained a challenge.

Last weeks decision by the Centre to deregulate diesel prices has to been

seen in this context. For the first time since the short-lived experiment in 2002when petrol and diesel prices were freed for a short period, oil companies will have

the freedom to manage retail price of diesel on their own and adjust it at periodicintervals to reflect market levels. Petrol prices were deregulated in June 2010 butfortnightly revisions have been a reality only since January 2013.

Both petrol and diesel are politically sensitive commodities but unlike petrol,diesel price changes have a cascading effect across the economy on everythingfrom bus and rail fares to vegetable and fruit prices. Governments have, therefore,


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been wary of freeing diesel pricing and the sustained rise in global oil prices from2002 until the crisis in 2008 did not help matters. The Modi government has nowgrabbed the opportunity provided by a falling global oil price regime prices of

benchmark Brent have fallen from around $105 a barrel in April to about $86 abarrel now to push through deregulation of diesel and it needs to becomplimented for this. Yet, deregulation of diesel, noteworthy as it is, is only thefirst step in much-needed reform of the oil sector.

What we immediately need is some transparency and reform of the methodsfollowed by the oil companies while setting fuel prices, whether petrol and dieselor cooking gas and kerosene. The concept of under-recovery has to be jettisonedand competition between the different playerspublic and privateneeds to beencouraged. That alone will allow proper price discovery for these economicallysensitive fuels.

The concept of under-recovery is unique to India. Under-recoveries arenothing but the difference between the oil companies desired price of a fuel, saydiesel, and its prevailing retail price in the domestic market. This desired price is

calculated on trade-parity basis that takes into account the landed cost of importedfuel and the price at which it is exported by domestic refineries. Presently, the ratiois 80:20 in favour of landed cost. For instance, if the price of a litre of diesel ascalculated on trade-parity basis is, say, Rs.70 a litre and the oil companies areselling diesel in the retail market at Rs.65 a litre, the under-recovery will be Rs.5a litre.

Under-recovery is not the same as a loss which happens when a producer isforced to sell his product below cost. Oil companies refine crude oil to producediesel (and other products such as petrol, cooking gas and kerosene) in their ownrefineries in India. They have not been importing diesel or petrol for a decade now,thanks to a sharp increase in domestic refining capacity.

Given this, why should the landed cost of imports, which includes itemssuch as freight, insurance, handling charges and, of course, customs duty, beconsidered for fixing domestic retail price? This is the unfair part about under-recoveries, a word that is often cleverly used interchangeably with losses. Let thisbe clear: under-recovery is a notional concept and does not necessarily mean aloss. The only exception when it could include a loss is where global crude oil

prices surge to abnormal levels and the retail price of fuels remains unchanged.There has not been such a situation in recent years.


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But why do oil companies harp on under-recoveries and demand thatdomestic price should be linked to that? Simply because the landed cost, whichincludes duties and other levies, offers them protection to cover up possibleinefficiencies in their operations. This protection is unnecessary and unfair todomestic consumers and all it does is promote inefficiency. It is no secret that the

public sector oil companies are saddled with high costs for reasons ranging fromexcess staff to duplication of facilities between them. By linking retail price tounder-recovery all that the government does is ensure that such inefficiencies are

passed on to consumers. Again, global prices of crude oil and refined fuels such aspetrol and diesel do not always move in tandem. The forces that drive theirrespective markets are different. For instance, the international market price of

petrol and diesel can spike if there is a refinery outage somewhere in the worldcausing supply disruption. There have been instances in the past when refined fuel

prices have surged due to a fire or a maintenance shutdown by a particular refinery.

Crude oil prices are not affected by such factors. By taking into account landedcost of refined fuels rather than crude oil, the oil companies may be forcingconsumers to pay a higher price when there is really no supply problem within thecountry.

Cost-plus pricing

The ideal way to go is for oil companies to price their products according totheir own cost structures. Each company has a unique cost structure which is a

factor of its refining efficiency. The final market price should be discovered on thebasis of the cost of crude plus refining costs and the margin of the oil company.

This can happen only in a competitive environment where the oil companiescompete with each other and against the three private players RelianceIndustries, Essar and Shell. As of now, the PSUs operate as a cartel when pricingtheir products, which is an anti-competition practice. Clearly, the next item on theagenda for the government should be to push the oil companies truly into themarket era where fuel prices are linked to efficiencies and vary not just between

the different players but between petrol stations of the same player based on whichone is more efficient. That will be real reform.

SOURCE:

http://www.thehindu.com/business/Economy/right-pricing-petrol-diesel/article6533469.ece
http://www.thehindu.com/business/Economy/right-pricing-petrol-diesel/article6533469.ecehttp://www.thehindu.com/business/Economy/right-pricing-petrol-diesel/article6533469.ecehttp://www.thehindu.com/business/Economy/right-pricing-petrol-diesel/article6533469.ece


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ANALYSIS:

BY VAIBHAV KUMAR YADAV

The article talks about the Indian governments biggest challenge of

deregulation of transportation fuel- petrol and diesel prices. Before this,deregulation experiment on fuel prices was done in 2002, but only for a short time.

Since January fortnightly revisions or revision of prices every 15 days, is the

reality.

According to the article, petrol and diesel are politically sensitive

commodities. The governments, so far have been cautious of freeing diesel prices

as the prices of other commodities are dependent on the same. The Modi

government has now grabbed the opportunity provided by a regime of global crude

oil price fall. The benchmark Brents per barrel prices of diesel in October were

$86 as compared to $105 in April. This fall in prices is the reason of this much

needed reform in the oil sector.

The transparency and reforms of pricing methods are the need of the hour

for the oil companies, while setting up the prices of petrol, diesel, LPG or

kerosene. Further, the competition between public and private players needs to be

encouraged.

The article also talks about the concept of under- recovery, which is the

differencebetween oil companiesdesired price of any fuel, which is calculated on

trade parity basis, and its prevailing retail prices in domestic market.

Let this be clear: under-recovery is a notional concept and does notnecessarily mean a loss. Oil companies refine crude oil to produce diesel (andother products such as petrol, cooking gas and kerosene) in their own refineries inIndia. They have not been importing diesel or petrol for a decade now, thanks to asharp increase in domestic refining capacity.

Given this, why should the landed cost of imports, which includes itemssuch as freight, insurance, handling charges and, of course, customs duty, beconsidered for fixing domestic retail price? This is the unfair part about under-recoveries, a word that is often cleverly used interchangeably with losses. Theonly exception when it could include a loss is where global crude oil prices surge


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to abnormal levels and the retail price of fuels remains unchanged. There has notbeen such a situation in recent years.

The article also suggested the cost plus pricing as the apt technique for oilcompanies. Each company has a unique cost structure which is a factor of itsrefining efficiency. The final market price should be discovered on the basis of thecost of crude plus refining costs and the margin of the oil company.

MY LEARNINGS FROM THE ARTICLE:

Pricing of fuels has been a politically sensitive issue. The fall in can be attributed to recent international fall in prices of oil per barrel.

The concept of under recovery: it does not necessarily mean loss; it is thedifference between oil companies desired price of any fuel, which is calculated

on trade parity basis, and its prevailing retail prices in domestic market.

Transparency in the pricing is the essence.

Competition between private and public players is must.

Cost plus pricing is one of the apt methods of pricing of these fuels.


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ARTICLE 2:

Modi government needs to decontrol retail prices of dieselDated:October 17, 2014JAIDEEP MISHRA

The significant drop in petroleum prices in the global markets is reasonenough to bring long-pending oil sector reforms on to the front-burner. In a coupleof years, India is slated to be the third-largest consumer of crude oil, the vast

bulk of which is imported at the going international rates, and we so need to

purposefully carry out policy and pricing reforms of petro- products to boostefficiency, raise productivity and bring down costs in our large and fast-growingoil economy.

Abroad, in the mature retail oil markets, about half the off take is by'independent' retailers, with no presence in upstream production or refining, butwhich nevertheless are able to competitively seek custom with efficient logisticsand quality delivery. We surely need such modernisation here. In a large market, tocontinue with the effective ring-fencing of oil sales would be at huge national cost.

Besides, in a scenario of much easier crude prices, and with expert analysessanguine that the softer trend would continue for an entire year and more, the wayahead for the government is to speedily decontrol retail prices of diesel, which is

by far the most-used petro-product, to better determine scarcity value goingforward.
http://economictimes.indiatimes.com/photo/44844055.cmshttp://economictimes.indiatimes.com/photo/44844055.cms


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The policy change would make eminent sense politically too, inthe backdrop of weakening prices. We need to promptly rationalise the hugeconsumption subsidies on oil products, remove distorting taxes on them, andinduce reforms and opening up in oil marketing. In tandem, what's necessary is tosystematically and innovatively overhaul the subsidy regime both for cooking gasand domestic kerosene via direct benefit transfers using Aadhaar. The diffusion oflight aids, like solar lanterns, would be environmentally benign and far cheaper.

The fact remains that for a decade now, flaring prices of crude and nonrevision in domestic prices of petro- goods have led to huge under-recoveries, extra

borrowings and massive consumption subsidies on oil products that have wroughteconomic havoc. Hence the need for proper price signals to deter runaway demandfor automotive fuels.

Meanwhile, the declining trend in global crude prices has much to do with acomfortable demand-supply situation, with demand muted and supply relatively

buoyant. The oil cartel Opec reduced output of late. But the move was more thanoffset by an incremental increase in non-Opec production that accounts for themajor part of global output of crude.

The US, meanwhile, remains by far the largest oil consumer, notching over19 million barrels per day (bpd). China comes next with roughly 10.5 million bpd.The consumption in India is projected to rise to just over 4 million bpd in a year ortwo. The International Energy Agency estimates world oil consumption at 93.5

million bpd for 2014, and that the figure would barely increase to 93.8 million bpdnext year in the face of subdued off take and lackluster demand.

The policy reform in oil and the changeover to market-determined prices forproducts like diesel would be fiscally transformative, bringing about much betterallocation of resources for investment right across the board, and put paid to open-ended consumption subsidies on petro-goods in the Budget, most of which areanyway appropriated by the non-poor.

In the 1990s, an expert group led by Vijay Kelkar, who then headed

administration in the petroleum ministry, estimated that proposed oil sectorreforms would lead to benefits that would cumulatively add up to Rs 1 lakh crore.Fast-forward to today, and taking into account present costs, the correspondingsavings on pricing reform and attendant policy changes would more likely meansavings on budgeted subsidies of about Rs 1 lakh crore on an annual basis. Thereare clearly many things money can't buy what it could 20 years ago.


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The point remains that subsidies, giveaways and populist nonrevision ofdomestic prices of oil products show up as under-recoveries for the public sectoroil marketing companies. These, in turn, give rise to unscheduled borrowings, andsoak up liquidity and generally add to the cost of funds for all and sundry. It isnotable that the under-recoveries on diesel have now been wiped out afterincremental price revision over several months.

The previous government did decontrol petrol prices and bulk sales ofdiesel. The Modi government now needs to follow through and decontrol retail

prices of diesel as well. Oil subsidies must not burn a big hole in the pocket of theexchequer.

SOURCE:

http://articles.economictimes.indiatimes.com/2014-10-17/news/55148511_1_bpd-oil-cartel-

opec-world-oil-consumption#
http://articles.economictimes.indiatimes.com/2014-10-17/news/55148511_1_bpd-oil-cartel-opec-world-oil-consumptionhttp://articles.economictimes.indiatimes.com/2014-10-17/news/55148511_1_bpd-oil-cartel-opec-world-oil-consumptionhttp://articles.economictimes.indiatimes.com/2014-10-17/news/55148511_1_bpd-oil-cartel-opec-world-oil-consumptionhttp://articles.economictimes.indiatimes.com/2014-10-17/news/55148511_1_bpd-oil-cartel-opec-world-oil-consumptionhttp://articles.economictimes.indiatimes.com/2014-10-17/news/55148511_1_bpd-oil-cartel-opec-world-oil-consumption


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ANALYSIS:

BY ROHIT AGARWAL

The significant fall in the petroleum prices in global markets is the reason

for bringing the oil sector reforms. In coming couple of years, India will becomethird largest consumer of crude oil. The good quantity of it is purchased at

prevailing international rates, so pricing reforms are necessary.

In foreign countries, which have a mature oil retail markets, half the off take

is by independent retailers. Such modernisation or reform is needed here as well.

The policy change will make sense politically too, since the prices are falling. The

huge consumption subsidies need to be rationalized and we need to remove taxes,

induce the reforms and open up the oil markets. The subsidies could be directly

transferred to Aadhaar card. The devices like solar lanterns would be safer for

environment and cheaper.

The reforms are necessary because the flaring prices of crude oil and non

revision of domestic prices, of petroleum products have led to huge under

recoveries, massive borrowings and consumption subsidies on oil products and

have wrought economic havoc.

The US is the largest oil consumer, notching over 19 million barrels per day

(bpd). China comes next with roughly 10.5 million bpd. The consumption in India

is projected to rise to just over 4 million bpd in a year or two. The International

Energy Agency estimates world oil consumption at 93.5 million bpd for 2014, and

that the figure would increase to 93.8 million bpd next year.

Policy of oil price determination by market forces for petroleum products

would be fiscally transformative, bringing about bringing about much better

allocation of resources for investment right across the board.

In the 1990s, a group of experts led by Vijay Kelkar, then head ofadministration, petroleum ministry, estimated that proposed oil sector reformswould lead to cumulative benefits of up to Rs 1 lakh crore. Fast-forward to today,and taking into account present costs, the corresponding savings on pricing reformand attendant policy changes would more likely mean savings on budgetedsubsidies of about Rs 1 lakh crore on an annual basis.


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It is notable that the under-recoveries on diesel have now been wiped outafter incremental price revision over several months. The previous government diddecontrol petrol prices and bulk sales of diesel. The Modi government now needsto follow through and decontrol retail prices of diesel as well. Oil subsidies mustnot burn a big hole in the pocket of the exchequer.


Falling international fuel prices is one major reason of introduction of pricingreforms in this sector.

Like in foreign markets, independent players need to form considerable part ofretail petroleum market.

Reform is necessary because flaring prices of petroleum products and nonrevision of domestic prices has led to enormous pressure on exchequer, underrecoveries, and extra borrowings.

USA is the largest oil consumer, notching over 19 million bpd.

China follows USA, notching roughly around 10.5 bpd.

Indias consumption is projected to rise upto million bpd in next two years.

In the 1990s, a group of experts led by Vijay Kelkar, then head ofadministration, petroleumministry, estimated that proposed oil sector reformswould lead to cumulative benefits of up to Rs 1 lakh crore.

To further help our cause of reducing burden on economy, we canuse deviceslike solar lanterns, would be safer for environment and cheaper.


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ARTICLE 3:

Narendra Modi government steps up economic reforms with

disinvestment post oil reforms

Dated: October 21, 2014

MANOJ KUMAR AND KRISHNA N DAS

The government promised on Monday to open up the coal industry to privateplayers and moved closer to selling a stake in state-owned Oil and Natural Gas

Corp (ONGC), as Prime Minister Narendra Modi picked up the pace on economic

reform days after relaxing fuel price controls.

Using an executive order, the Cabinet agreed to allow private companies to

mine and sell coal at an unspecified future date, Finance Minister Arun Jaitley said.

That sets the stage for the biggest liberalisation of the domestic industry in more

than 40 years.

The success of Bharatiya Janata Party (BJP) in the Maharashtra and

Haryanaassembly elections last week capped several days of action on the

economic front and has given PM Modi more room to cut through a thicket of

regulations and state controls he says holds back Asia's third-largest economy.
http://businesstoday.intoday.in/story/pm-narendra-modi-bjp-govt-in-haryana-maharashtra-assembly/1/211553.htmlhttp://businesstoday.intoday.in/story/pm-narendra-modi-bjp-govt-in-haryana-maharashtra-assembly/1/211553.html


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"Reform is the art of the possible," Jaitley earlier told TV network ET Now,

hinting that more was to come. "In the first year, when people expect lot of reforms

and there is lot of popular support behind the reform process, it is more easily

possible," the Finance Minister said.The Prime Minister was elected in May on promises he would create jobs

and rejuvenate the domestic economy, but investors and economists were

disappointed by his first budget and a lack of early progress on fixing structural

economic problems.

In the last week, Modi has gone some way towards quelling those concerns,

putting in a reform-minded team at the Finance Ministry that includes prominent

US-based economist Arvind Subramanian to help formulate the budget and policy

as the Chief Economic Adviser (CEA).

The economy is showing some signs of revival and inflation has plummeted,

aided largely by a drop in global oil prices.

On Saturday, the Cabinet deregulated diesel pricing and raised the price the

government pays producers of natural gas by a third to US $5.61 per million

British thermal units (mmBtu).

Modi also began an overhaul of creaky labour rules, cutting the power of

labour inspectors and slashing the red tape for small companies that make the

country one of the toughest places in the world to do business.

The domestic stock market, bonds and rupee currency all performed strongly on

Monday in response to the new economic policies and the victories by the BJP in

Maharashtra and Haryana.

Undoing Indira

Former Prime Minister Indira Gandhi nationalised the coal industry in 1972,

creating one of the world's largest mining companies, state-owned Coal India

(CIL).

The system was intended to provide steady supplies of fuel and help

industrialisation, but CIL is now deeply dysfunctional. Most of the country's

electricity is generated by coal, but long power cuts are the norm in major parts of


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the nation. Despite having the world's fifth-largest coal reserves, India is the

world's third largest importer of the resource.

As of last Wednesday, 64 out of 103 power stations had coal for less than a week,

mainly due to a shortfall in supplies from Coal India, according to the powerministry.

Private companies are already allowed to mine supplies for their own power plants

and other industrial projects, and CIL hires some private firms to operate mines.

But until now private companies have not been permitted to sell coal.

"This would lead to an optimum utilization of the national resource," the Finance

Minister told reporters, adding that there was no move to fully privatise CIL.

However, the government does plan to sell 10 per cent of its majority holding in

the inefficient behemoth, which is plagued by corruption. Unions oppose the sale.

The Supreme Court last month scrapped the licenses for 214 coal fields that

supplied power, cement and other companies over allegations of graft. Monday's

decision to liberalise the coal industry was tacked onto an executive order to allow

the auction of the scrapped coal fields.

The executive order, known as an ordinance, takes immediate effect but must be

approved by parliament within a few months. Modi's government will have to win

cross-party support for its plan, since it does not have a majority in Rajya Sabha.

Selling stakes to pay the bills

The reforms in diesel and gas pricing make ONGC, the public sector oil producer,

more attractive to investors by reducing the hefty discount on crude oil sales that it

must give to fuel retailers.

On Monday, the administration's top privatisation official met bankers in Mumbai,

to discuss the sale of a 5 per cent stake ONGC, a top Finance Ministry official said.

Shares in ONGC, the second-largest listed firm in India by market value, gained

5.6 per cent on Monday. The government has a stake of 68.94 per cent in the

company, which has shares of in oil and gas fields across the globe.

The Finance Ministry hopes to raise up to $3 billion from the ONGC sale, almost a

quarter of its target for asset sales for the current financial year.


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Citigroup and HSBC are among five banks chosen to manage the planned sale of a

stake in ONGC, sources told Reuters in August.

The ONGC share sale was likely to be held in the first half of November, two

people directly involved with the transaction said on Monday. The pre-salemarketing road shows for the offering are expected to be completed by the first

week of the month, they said.

A top finance ministry official, who spoke on conditions of anonymity because of

the sensitivity of the topic, also told reporters the government wanted to pass a bill

in parliament's next session to free up foreign investment in the insurance industry.

Jaitley, in his maiden budget in July, set a target of Rs 58,425 crore to be raised by

the sale of shares in public sector undertakings (PSUs) and minority stakes in

private companies. Another major planned sale is of a 10 per cent stake in giant

CIL.

The income is key to meeting a challenging goal of a fiscal deficit of 4.1 per cent

of gross domestic product for the year ending March 31, 2015. Tax revenue has

been less than budgeted this year, and government finances have been stung by a

large bill for tax rebates.

One restraint on PM Modi's government is his small bench of ministers, many

holding multiple portfolios. Jaitley, for example, doubles as defence minister. The

Information and Broadcasting Minister Prakash Javadekar, who also acts as

environment minister, last week suggested that an expansion of the cabinet was

imminent.

SOURCE:

http://m.businesstoday.in/story/narendra-modi-economic-reforms-disinvestment-drive-

diesel/1/211569.html
http://m.businesstoday.in/story/narendra-modi-economic-reforms-disinvestment-drive-diesel/1/211569.htmlhttp://m.businesstoday.in/story/narendra-modi-economic-reforms-disinvestment-drive-diesel/1/211569.htmlhttp://m.businesstoday.in/story/narendra-modi-economic-reforms-disinvestment-drive-diesel/1/211569.htmlhttp://m.businesstoday.in/story/narendra-modi-economic-reforms-disinvestment-drive-diesel/1/211569.htmlhttp://m.businesstoday.in/story/narendra-modi-economic-reforms-disinvestment-drive-diesel/1/211569.html


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ANALYSIS:

BY SHUBHANGI MITTAL

The article talks about governments promise of opening up the coal industry

to the private players and also selling a stake in the state owned Oil And NaturalGas Corporation.

Using an executive order, the Cabinet agreed to allow private companies tomine and sell coal at an unspecified future date, setting the platform for the biggestliberalization in the industry in last 40 years.

The economy is showing some signs of revival and inflation has dropped,aided largely by a drop in global oil prices.

On Saturday, the Cabinet deregulated diesel pricing and raised the price thegovernment pays producers of natural gas to US $5.61 per million British thermal

units (mmBtu). Modi also began an overhaul of old fashioned labour rules, cutting

the power of labour inspectors and slashing the red tape for small companies.

The domestic stock market, bonds and rupee currency all performed strongly

on Monday in response to the new economic policies and the victories by the BJP

in Maharashtra and Haryana.The middle section of this article talks about Modi governments policies

undoing the former PM Indira Gandhis policy of nationalizing the coal sector.Theformer system was intended to provide steady supplies of fuel and helpindustrialisation. But Coal India limiteds situation is downtrodden. Despite havingthe world's fifth-largest coal reserves, India is the world's third largest importer ofthe resource, and power cuts are common.

The executive order, known as an ordinance, takes immediate effect butmust be approved by parliament within a few months. Modi's government willhave to win cross-party support for its plan, since it does not have a majority inRajya Sabha.

The last section talks about selling the stakes of Oil and Natural GasCorporation, in which government has 68.94 percent stake.The Finance Ministryhopes to raise up to $3 billion from the ONGC sale. Arun Jaitley, in his maiden

budget in July, set a target of Rs 58,425 crore to be raised by the sale of shares inpublic sector undertakings (PSUs) and minority stakes in private companies.Another major plan is to sell a 10 per cent stake in giant CIL.


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The current policy reform is the biggest such reform in last forty years.

The Cabinet deregulated diesel pricing and raised the price the government paysproducers of natural gas.

Article talks about Modi governments policies undoing the former PM IndiraGandhis policy of nationalizing the coal sector.

Despite having the world's fifth-largest coal reserves, India is the world's third

largest importer of the resource Article talks about selling the stakes of Oil and Natural Gas Corporation, in

which government has 68.94 percent stake.

Arun Jaitley, in his maiden budget in July, set a target of Rs 58,425 crore to beraised by the sale of shares in public sector undertakings (PSUs).


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ARTICLE 4:

Government oil subsidy bill to be cut by over 60% in FY15

Dated: October 15, 2014

PTI

With international oil prices dropping to multi-year lows, government's oil

subsidy bill is likely to be slashed by over 60 per cent in the current fiscal.

The government currently controls diesel, domestic LPG and kerosene and prices

them at rates below cost. The losses oil firms thus incur are made good by way of

cash subsidy and asking upstream oil producers like ONGC to give discounts.

In 2013-14, the government provided Rs 70,772 crore by way of cash

subsidy while upstream firms picked up Rs 67,021 crore tab.

With oil prices dropping to four-year low of less than $84 per barrel, the under-

recovery or revenue loss arising out of selling diesel, domestic cooking gas (LPG)

and kerosene at prices lower than imported cost this fiscal is estimated at Rs86,080crore.

This is lower than Rs 1, 39,869 crore gross under-recovery last fiscal,

industry and government sources said. Sources said the under-recovery in the first

quarter (April-June) was Rs 28,691 crore. This was mostly met by Rs 11,000 crore

cash subsidy from the government and Rs 15,547 crore coming from ONGC, Oil


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India Ltd (OIL) and GAIL. The remaining Rs 2,144 crore was absorbed by fuel

retailers (IOC, BPCLand HPCL).

In second quarter, the under-recovery is estimated at Rs 21,198 crore with

diesel accounting for Rs 2,848 crore as compared to Rs 9,037 crore in the Junequarter. Kerosene under-recovery was Rs 6,950 crore (Rs 7,524 crore in Q1) and

LPG was Rs 11,400 crore (Rs 12,129 crore in Q1). With diesel under-recovery

being wiped out last month and fuel retailers in fact making a profit of over Rs 2 a

litre, the share of nation's most consumed fuel in overall under-recovery for 2014-

15 fiscal will be just Rs 12,189 crore. Sources said the government has not account

the cash subsidy and upstream share for Q2.

While the government had deregulated or freed petrol prices in June 2010,

diesel prices have been raised by up to 50 paisa a litre every month since January2013. The hikes together with a sharp drop in international oil prices have helped

wipe out the under-recovery or loss on diesel.

Currently, oil firms are making Rs 2.25-2.50 a litre profit on diesel, which

should have been passed to consumers in form of a price cut but the same has been

postponed due to assembly elections in Maharashtra and Haryana

Oil firms lose Rs 31.22 a litre on kerosene and Rs 404.64 per 14.2-kg LPG

cylinder.

Sources said the government had provided Rs 1,00,000 crore cash subsidy in

2012-13 when under-recoveries touched an all-time high of Rs 1,61,029 crore. In

the preceding year, it had provided Rs 83,500 crore.

SOURCE:

http://m.economictimes.com/industry/auto/news/oil-and-lubes/Government-oil-subsidy-

bill-to-be-cut-by-over-60-in-FY15/articleshow/44826054.cms
http://m.economictimes.com/industry/auto/news/oil-and-lubes/Government-oil-subsidy-bill-to-be-cut-by-over-60-in-FY15/articleshow/44826054.cmshttp://m.economictimes.com/industry/auto/news/oil-and-lubes/Government-oil-subsidy-bill-to-be-cut-by-over-60-in-FY15/articleshow/44826054.cmshttp://m.economictimes.com/industry/auto/news/oil-and-lubes/Government-oil-subsidy-bill-to-be-cut-by-over-60-in-FY15/articleshow/44826054.cmshttp://m.economictimes.com/industry/auto/news/oil-and-lubes/Government-oil-subsidy-bill-to-be-cut-by-over-60-in-FY15/articleshow/44826054.cmshttp://m.economictimes.com/industry/auto/news/oil-and-lubes/Government-oil-subsidy-bill-to-be-cut-by-over-60-in-FY15/articleshow/44826054.cms


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ANALYSIS:

BY MANU MISHRA

The article is about Government oil subsidy. The government currently

controls diesel, domestic LPG and kerosene and prices them at rates below cost.

With international oil prices dropping to multi-year lows, governments oil

subsidy bill is likely to be slashed by over 60 percent in the current fiscal.

The government currently controls diesel, domestic LPG and kerosene and prices

them at rates below cost. The losses oil firms thus incur are made good by way of

cash subsidy and asking upstream oil producers like ONGC to give discounts.

Sources said the under-recovery in the first quarter (April-June) was Rs

28,691 crore. This was mostly met by Rs 11,000 crore cash subsidy from thegovernment and Rs 15,547 crore coming from ONGC, Oil India Ltd (OIL) and

GAIL. The remaining Rs 2,144 crore was absorbed by fuel retailers (IOC, BPCL

and HPCL). In second quarter, the under-recovery is estimated at Rs 21,198 crore

with diesel accounting for Rs 2,848 crore as compared to Rs 9,037 crore in the

June quarter. Kerosene under-recovery was Rs 6,950 crore (Rs 7,524 crore in Q1)

and LPG was Rs 11,400 crore (Rs 12,129 crore in Q1).

While the government had deregulated or freed petrol prices in June 2010,

diesel prices have been raised by up to 50 paisa a litre every month since January

2013. The hikes together with a sharp drop in international oil prices have helped

wipe out the under-recovery or loss on diesel.

Currently, oil firms are making Rs 2.25-2.50 a litre profit on diesel, which

should have been passed to consumers in form of a price cut but the same has been

postponed due to assembly elections in Maharashtra and Haryana.


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ARTICLE 5:

Diesel price may come down for first time in 7 years

Dated: September 9, 2014

RAJEEV JAYASWAL

India is considering a cut in diesel prices for the first time in seven years

amid global crude price dropping below $100 a barrel for the first time in more

than a year, a move that could take some of the sting out of inflation as a patchy

monsoon threatens a rise in food prices.

That in turn could allow the central bank to ease up on its interest-rate stance

at the next monetary policy announcement, boosting revival prospects.

This comes as the government has been considering freeing up diesel prices, since

subsidy has been narrowed by incremental, monthly price increases.

"If this downward trend in international oil prices continues and the rupee

appreciates even marginally, there will be over-recovery from this month," said a

senior executive at oil PSU who didn't want to be named.

"We intend to pass this to customers," said the executive. A price review isexpected on September 15.But the decision regarding diesel pricecut will be taken

by the government because it is a regulated fuel."

The government is still evaluating the political situation in poll-bound states

before deregulating the fuel, government and industry officials said.


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Benchmark Brent crude fell on Monday to a 14-month low of $99.59 per barrel,

dropping below $100 for the first time since June last year because of sluggish

demand from major importers, particularly China. Meanwhile, the rupee has

appreciated marginally against the dollar, which has almost aligned pump prices of

diesel with market rates.

According to the oil retail industry, pump prices of diesel have not been cut

in the last seven years except for a marginal reduction on July 25, 2012, because of

changes in distribution costs. Oil companies review petrol and diesel prices every

fortnight. While petrol prices change on the 15th and 30th of every month, the

government has been raising diesel prices by 50 paise every month since January

last year. The previous UPA government had decided to raise diesel rates in small

monthly doses until pump prices were aligned with market rates and it could be

deregulated. According to oil companies, apetrol price cut is imminent for the

fourth time in a row.

"No decision has been taken on diesel price deregulation. The oil ministry

has not yet circulated the Cabinet note to this effect," a senior government official

said on condition of anonymity. The oil ministry is keeping a close watch on fuel

pricemovements and is ready to present a draft cabinet note at short notice,

officials said.

The government is hesitant to free diesel prices just before assembly

elections in four states - Jammu & Kashmir, Maharashtra, Bihar and Jharkhand.

"International petrol and diesel rates are highly volatile. Political prospects of the

ruling BJP will be hampered in case their rates jump during assembly elections,"

one official said. According to officials, a final decision on deregulation will be

taken after consulting the finance ministry.

The diesel subsidy used to be a major drag on the exchequer, having

accounted for about 45-50% of total fuel subsidies until January last year. The

UPA government's move to make a monthly increase narrowed the diesel subsidy

to an estimated Rs 19,584 crore in the current financial year from Rs 62,837 crore

in 2013-14.


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ANALYSIS:

BY SRIDEVI AGARWAL

This article is aboutto cut diesel prices for the first time in seven years amidglobal crude price plummeting below $100 a barrel for the first time in more than a

year to cut diesel prices for the first time in seven years amid global crude price

plummeting below $100 a barrel for the first time in more than a year.

The government is still evaluating the political situation in poll-bound states

before deregulating the fuel.

International petrol and diesel rates are highly volatile. Political prospects

of the ruling BJP will be hampered in case their rates jump during assemblyelections, one official said. According to officials, a final decision on deregulationwill be taken after consulting the finance ministry.

The diesel subsidy used to be a major drag on the exchequer, havingaccounted for about 45-50% of total fuel subsidies until January last year. TheUPA governments move to make a monthly increase narrowed the diesel subsidy

to an estimated Rs 19,584 crore in the current financial year from Rs 62,837 crorein 2013-14.

The result has been that petrol prices have moved in tandem with global costand retail rates being reduced on five occasions since August on falling oil rates.Prices have cumulative come down by close to Rs 7 per litre in last two-and-halfmonths. On diesel, the entire under-recovery or loss has been eliminated and oilfirms started making profit from second half of September. The over-recovery or

profit has since reached Rs 3.56 per litre. Deregulation would mean that thegovernment and state-owned explorers including Oil and Natural Gas Corp(ONGC) are no longer subsidising diesel. Finance Minister Arun Jaitley had

budgeted Rs 63,400 crore for petroleum subsidies which was 25 per cent lowerthan previous fiscal. But unlike past, the subsidy bill is unlikely to overshoot the

budgeted amount due to fall in oil rates.

Oil subsidy account for a quarter of Rs 2.51 lakh crore. Originally, petroland diesel prices were deregulated in April 2002 when the NDAgovernment wasin power. Administered pricing regime, however, made a back-door entry towardsthe end of NDA regime in the first quarter of 2004 when crude prices startedinching up. The Congress-led UPA controlled rates as international oil prices went


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through the roof. In June 2010, however, it freed petrol price from its control andrates have since then moved more or less in tandem with cost. It had in-principledecided to deregulate diesel, which is used in everything from cars and trucks to

back-up power generators and agricultural water pumps. The fuel accounts for 43per cent of the nation's fuel consumption.

In January 2013, the then UPA government decided to deregulate dieselprices in stages through a monthly 50 paisa a litre increase. Rates were last hike onSeptember 1 after which losses have been wiped off. It is estimated that under-recovery or revenue loss on selling diesel, LPG and keroseneat prices lower thanimported cost this fiscal will be around Rs 86,080 crore. This will have to be met

by cash subsidy from government as well as dole from upstream oil producers likeONGC. The under-recovery estimate for the current fiscal is lower than Rs1,39,869 crore of last fiscal. In 2013-14, the government had provided Rs 70,772

crore by way of cash subsidy while upstream firms picked up Rs 67,021 crore tab.


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ARTICLE 6:

Budget 2014: Government to de-regulate diesel prices; reducesubsidized LPG cylinders this fiscal

Dated: July 10, 2014

SARITA C SINGH

The Budget has proposed to decontrol diesel prices and reduce the number

of subsidised cooking gas cylinders in the current financial year to eliminate yearly

subsidy burden of Rs 140,000 crore.

"It is expected that the gap between administered price and market price of

diesel would be eliminated by early FY2014-15. Thereafter, both petrol and diesel

would be deregulated and linked to market prices, leaving PDS, kerosene and LPG

subsidy," the Budget said.

According to oil ministry data, under-recovery stood at Rs 3.40 per litre on

sale of diesel and at Rs 449.17 on sale of LPG cylinder. Diesel under-recoverieshad fallen to Rs 1.65 per litre by June 15 but rose soon after the Iraq crisis. The

government has been gradually increasing diesel prices by Rs 0.50 per litre every

month.


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Fuel subsidy in 2013-14 was about Rs 140,000 crore, of which diesel accounted for

over Rs 62,800 crore.

"If there are no international shocks in the oil sector, it is expected that in a

year the government will be able to decontrol diesel fully. With rising fuel subsidy,there is need to cap the subsidised cylinders at a more realistic level," the Budget

said.

The move aims at reducing the government's total subsidy outgo on food,

petroleum and fertilisers to 2% of GDP in the current financial year from 2.3% last

fiscal.

"In order to achieve the fiscal targets of fiscal consolidation it is essential

that government follows the policy of progressively reducing the expenditure on

subsidy through improved targeting of beneficiary," the Budget said.

However, stabilisation of external exchange and stable international crude

oil prices are critical in the process of rationalisation of diesel prices," it added.

Source:

http://articles.economictimes.indiatimes.com/2014-07-10/news/51301153_1_diesel-prices-

petrol-and-diesel-oil-ministry-data
http://articles.economictimes.indiatimes.com/2014-07-10/news/51301153_1_diesel-prices-petrol-and-diesel-oil-ministry-datahttp://articles.economictimes.indiatimes.com/2014-07-10/news/51301153_1_diesel-prices-petrol-and-diesel-oil-ministry-datahttp://articles.economictimes.indiatimes.com/2014-07-10/news/51301153_1_diesel-prices-petrol-and-diesel-oil-ministry-datahttp://articles.economictimes.indiatimes.com/2014-07-10/news/51301153_1_diesel-prices-petrol-and-diesel-oil-ministry-datahttp://articles.economictimes.indiatimes.com/2014-07-10/news/51301153_1_diesel-prices-petrol-and-diesel-oil-ministry-data


28/30

ANALYSIS

BY SHUBHAM GUPTA

According to the budget 2014 , Modi government has de-regularized the

diesel prices as it is been decided that in this fiscal year 2014 - 2015 the dieselprices are to be regulated by the market prices of the crude oil . Similarly, In the

previous government the petrol prices were also been de-regulated by the

government

Here is some data of oil ministry:

Under recovery stood at Rs 5.40 per litre on sale of diesel and Rs 449.17 on sale

of LPG cylinder.

Diesel under recoveries had fallen to Rs 1.65 per litre but rose due to Iraqcrises.

Fuel subsidy in 2013 2014 was about Rs 1, 40,000crore of which diesel

accounted for over Rs 62,800 crore.

There might be several reasons behind it according to various sources one of

reasons behind this de-regulation is that as the people always blame the

government for the increasing prices of petrol and diesel, But by deregulating the

prices the government took a safe side and from now they arent responsible for

any increase and decrease of the prices of diesel as now the market is having the

control on it. Sidewise, the prices of the crude oil is going down which will

further reduce the prices of petrol, diesel, kerosene, LPG etc.

The reasons behind this are as follows:

U.S shale gas production Low demand from china ( due to stagnant economic growth )

Crisis in Arab countries ( black marketing of oil through ISIS )


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Since our economy is import oriented, So this step taken by the Modi government

will make considerable efforts in making our economy export oriented rather being

import oriented.

Current account deficit (CAD) = Import - Export


It is good to let market control the commodities, because that will

show the real projection of our country.

Diesel- The fuel of our economy should be top priority as because

most of our other sectors are directly or indirectly related to it.

Making diesel cheap will also leads to cheap transportation and

transportation is a common link in all the sectors.


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Conclusion:

Towards the end, we would like to say that all these articlesconverge on the point that new policy on petro- products aims toreduce burden on exchequer by privatizing this sector, reducingsubsidies on LPG, petrol and diesel.

Crux of the various articles is the impact of the new policyof the Modi government. It puts light on the pricing mechanismsopted by this industry, like cost plus pricing etc.

The articles talk about Arun Jaitleys targets to raise fundsthrough privatisation, and comparing it with Indira Gandhisnationalisation policy.

All in all, we have tried to analyse the very crucial subjectof petroleum pricing policy, and tried to present various aspectsof this sensitive issue.

Macro Economics and Business Policy

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