Press Note

The Government had constituted an Expert Group to advice on Pricing Methodology for Diesel, Domestic LPG and PDS Kerosene under the chairmanship of Dr. Kirit S. Parikh (Former Member, Planning Commission). The other members of the expert group are Mr. P.K. Singh (Joint Secretary (IC&GP), MoP&NG), Dr. Saurabh Garg (Joint Secretary (PF-II), MoF), Prof. S.K. Barua (Professor and Former Director - IIM, Ahmedabad) and Mr. R.K. Singh (Joint Secretary (Refineries), MoP&NG).

The Chairman of the Expert Group has submitted the report to the Minister of Petroleum & Natural Gas Dr. M. Veerappa Moily here today (30th October 2013). The summary of the recommendations made by the expert group in the report is reproduced below:

Summary of Recommendations

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1.              Need for Robust refining sector in India

       i.               India, which is one of the largest energy consuming countries, needs to ensure that the country maintains self-sufficiency in the refining sector in future. The pricing policies, therefore, should also be geared to ensure sufficient returns to the refineries in the country for long-term sustainability of the petroleum sector and to ensure energy security of the country.

2.             Pricing mechanism

       i.               From examination of various alternative pricing mechanisms, the expert group noted that there is no single or unique formula which can be said to represent the correct method for domestic prices in India that would not be distortionary with attendant ill-effects for the economy from the distortions. Therefore, the best course of action is to free the market from price controls at the earliest.

     ii.               In view of the significant gap between the present administered prices and the international prices, the committee has spelt out the arrangements that may prevail in the interim till the best course of action is implemented.

3.             Diesel

       i.               The Expert Group recommends that since the government has already decided to eventually free diesel price, there is no need to tinker with the existing pricing formula, which, even if modified, will not solve the problem of mounting under-recoveries incurred on sales of controlled products, mainly due to high international crude prices and depreciation of Indian rupee.  The Expert Group therefore recommends to continue with TPP as per current policy.

     ii.               The group recommends that the Government should take steps to pass on the impact of rise in price of Diesel to consumers and move rapidly towards making the price of diesel market determined.

    iii.               The Expert Group recommends that diesel price be raised by Rs. 5.00/ litre with immediate effect andthe balance under-recovery should be made up through a subsidy of Rs. 6/litre to PSU OMCs. The subsidy on diesel should be capped at Rs. 6/ litre. This would imply freeing of price of Diesel beyond this cap.

   iv.               Any rise in the gap between domestic and international prices beyond Rs. 6/litre should be made up by corresponding increase in the price of Diesel in the domestic market by the OMCs. If the gap falls below Rs. 6/litre, either the prices should be reduced or the subsidy to be provided should be reduced. The second option is recommended by the Expert Group as that would lead to decline in subsidy over time. In the future, oil companies should be permitted to revise the prices above the subsidy cap (in line with the changes in the international prices and other costs elements) on their own. .

     v.               The expert group recommends that the fixed subsidy of Rs. 6/litre be reduced gradually and finally removed through regular monthly downward revisions in the cap on subsidy and corresponding increase in the price of diesel over the next one year.

4.             PDS Kerosene

       i.               The expert group recommends that PDS kerosene is priced at full market price and the benefit of the subsidy to the deserving consumers i.e. BPL families, is given through direct cash transfer mechanism. For this purpose, the DBTK scheme for Direct Transfer of Subsidy to BPL families throughout the country should be fast-tracked and completed within the next two years.

     ii.               Till this is implemented, the expert group recommends that the price of PDS Kerosene be increased by Rs. 4/Litre immediately and thereafter the price of PDS Kerosene be revised from time to time at least in line with growth in the per capita agriculture GDP.

    iii.               Allocation of PDS Kerosene should be reduced with spread of rural electrification and increased use of LPG and PNG for cooking.

   iv.               Since Kerosene is neither exported nor imported and also since there is no custom duty on PDS Kerosene, it’s pricing may continue to be based on IPP.

5.             Domestic LPG

       i.               The Expert Group recommends that the limit for subsidized cylinders be reduced from the present 9 to 6 cylinders per annum to each household and the DBTL scheme be restricted to identified families based on an exclusion criteria.

     ii.               The DBTL scheme be implemented throughout the country for Direct Transfer of Subsidy to identified families within next one year.

    iii.               The price of subsidized domestic LPG be raised by Rs. 250/cylinder immediately and the balance subsidy be phased out over the next 2 years through gradual price increase.

   iv.               Piped natural gas to homes be actively promoted in urban areas.

     v.               As the country continues to be heavily dependent on imports of LPG, the methodology of fixing refinery gate price of Domestic LPG should continue on IPP basis.

6.             Upstream Contribution

       i.               Taking into account the existing contribution, contribution worked out under NELP regime and slab based discounts, the Expert Group recommends following contribution formula for ONGC & OIL from the financial year 2014-15 onwards:

     ii.               Keeping in view the current high level of under-recoveries, the contribution from ONGC & OIL during the financial year 2013-14 may be retained at the existing level of $56/bbl. of crude oil produced.

    iii.               As regards GAIL, with the reduction in availability of APM gas it is recommended that GAIL’s contribution should not exceed the gross profit made on sale of LPG (after allowing a reasonable profit amount to be retained by GAIL).

   iv.               After adjusting the upstream contribution, the balance amount of under-recovery on Diesel, PDS Kerosene and Subsidized Domestic LPG should be fully compensated to OMCs by providing cash subsidy from the Government budget until the prices are fully deregulated and subsidy on these products is eliminated.

7.             Operational and procurement efficiencies

The expert group recommends that OMCs be given the freedom to procure crude oil and petroleum products through a mix of long terms contracts and spot purchases from all available sources. This can be accomplished without compromising transparency and accountability by working out mechanisms in consultation with the CVC.

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Ministry of Petroleum and Natural Gas, Government of India.

New Delhi, October  30, 2013

RCJ/ Kirit Parikh Report-30-10-2013