India Energy Conference 2008

Session 4 - Product Pricing & Subsidies

Ruchika Chawla Associate Fellow

3-4 October 2008

Multiple Objectives of Pricing System

Providing resources for the government
Providing adequate incentive to oil companies

Minimising impact on consumers

Promoting efficient consumption choices

Petroleum Pricing History

APM Pricing System (1975-1998)

Dismantling of APM (1998-2002)

Post APM dismantling (2002-present)

Dismantling of APM proposed

Prices of all petroleum products except MS, HSD, ATF, PDS Kerosene, Domestic LPG to be de-controlled (April 1998) Pricing of MS & HSD to be de-controlled (April 2002) There was fortnightly revision of the MS & HSD prices by the OMCs in consultation with the GoI Subsidy on PDS Kerosene and Domestic LPG to be reduced

Post Dismantling of APM: the Current Situation

Proposal Prices of all petroleum products except MS, HSD, ATF, PDS Kerosene, Domestic LPG to be de-controlled Pricing of MS & HSD to be decontrolled There was fortnightly revision of the MS/HSD prices by the OMCs in consultation with the GoI Subsidy on PDS Kerosene and Domestic LPG to be gradually reduced Implementation Status

X X

/ X

Inadequate Price Increases

300% 280% 260% 240% 220%

180% increase 150% increase

200% 180% 160% 140% 120% 100% 2004 Brent Crude Diesel 2005 2006 2007 Year Indian Crude basket Petrol Kerosene LPG 2008

23-30% increase 1% increase

Source: IOCL website

Inadequate and ad-hoc price revisions

Impact on Indian Economy

High costs of inaction
Trebling of under recoveries from Rs 20146 crores to Rs 77123 crores in 3 years Under recoveries of oil companies 51% of fiscal deficit

Government committed to reduce its gross fiscal deficit to 3 % of GDP by 2009

Current GFD 4% of GDP (2007-08)

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

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

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

Impact on Oil Companies

OMCs incurring losses of Rs.400 crore/day on sale of petrol, diesel, Kerosene & LPG*
Per unit under-recovery*
Diesel - Rs.13.69/litre

Petrol - Rs 6.31/litre
PDS Kerosene - Rs 31.39/ litre LPG cylinder - Rs 312.58/ cylinder

Increasing exposure to debt for the oil companies

Crowding out private sector participation
- based on average price for second fortnight of August 2008 Source: Economic times (31st August 2008)

Impact of Lopsided Pricing

Increased market distortions At high crude oil prices, subsidized diesel cheaper than FO prices
Industries and power plants shifting from FO to diesel Increased demand for diesel Increasing imports for diesel increased pressure on OMCs
Sub optimal utilization of petroleum products

MS HSD pricing
High incidence of taxation in the MS and HSD pricing
45% in the petrol retail price
Particular Customs Excise Duty Corporation Tax Total Tax Revenue Total revenue to centre from pet sector Revenue from petroleum sector (2006-07) 10043 58821 12153 81017 Total govt revenue 86327.24 117612.76 144318.3 353182.27

% share 11.63% 50.01% 8.42% 22.94%

25% in the diesel retail price

Steady movement from ad-

valorem to specific duties

93802

658240.25

14.25%

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

Decreasing share of budgetary subsidies .

40000 35000 30000 28584 24630 17842 34625

Rs Crore

25000 20000 15000 10000 5000 0 2447 2004-05

2496 2005-06 Year Under recoveries

2541 2006-07

2700 2007-08

Budgetary subsidies

Source: PPAC and Basic Statistics (MoPNG)

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

Kerosene and LPG Subsidies

Kerosene
Subsidized kerosene siphoned off to adulterate diesel Less than 2% of rural households use kerosene for cooking 55% rural households use for lighting but is an inefficient source of lighting

LPG
76% subsidy goes to urban areas 40% of subsidy enjoyed by top 6.75% total population
Source: TERI Publication Petroleum pricing in India: Balancing equity and efficiency, November 2005,

Challenges
Need to move away from ad-hoc price revisions Need to move to full cost pricing at the earliest Need to adopt targeted subsidy delivery

mechanism

Thank You