The Administered Price Mechanism (APM) was supposed to be dismantled from April,'02. The decontrolling meant PSU refineries would no longer get 12% assured return on their asset plus operating cost. Like any other organization, they would have to earn their own profit. The product prices, too, would be liberated from government control. The market forces of supply and demand would decide product price. But the high volatility in the crude price since the days of gulf war and an upwardly moving trend could destabilize the economy in a free market scenario. Especially, any movement in the price of major fuels like petrol, diesel, LPG and Kerosene would significantly impact the inflation level, affecting the industry and people's lives alike. A policy decision leading to northward moving prices can greatly undermine the political aspirations of the ruling party, even if the decision is imperative in the long term interest of the country. As a result, govt settled for only partial liberalization of the fuel policy, keeping the control on the prices of four major fuels with itself. As per the revised guidelines, the fuel prices were to be reviewed every fortnight based on overall trend in crude price movement.
No doubt, the policy was aimed at insulating the economy from the volatility in the crude prices. But, is it the best way to protect the interests of the country? Are there any drawbacks of govt controlled fuel prices?
It has been observed that govt is always hesitant in its response to a rising trend in crude price. Apparently, pol
itical compulsions force the govt to hold back even on justified fuel price hike. As a result, the PSU oil marketing companies have to bear the loss running into thousands of crores of rupee. This loss is partly compensated by the govt in the form of oil bonds being issued to these PSU OMCs from time to time. Upstream oil companies like ONGC and GAIL share a portion of this subsidy burden. The rest is born by the PSU OMCs themselves. In short, the PSU OMCs are protected by the govt to keep the fuel prices under check in times of rising oil prices. This approach has made entry of private players into the business if oil marketing extremely difficult.They can not compete with govt dictated low prices, when their input cost is constantly moving up. Big names like Reliance, Essar and Shell had set up huge network of retail outlets throughout the country anticipating total deregulation of the oil sctor. They all are now forced to keep their fuel outlets shutin the absence of a level playing field. We all know how much important the entry of private sector is for any industry in terms of better productivity, advanced technology and nurturing talents. In the absence of external competition, the letharic PSU culture would thrive even more, while the govt still continuing to provide financial support.
Secondly, if we dig a bit deeper into the issue, it turns out that it's the tax payer's money only, which is used to pay for the fuel subsidy. In a way, the salaried class, accounting for 70% of the direct tax collections by govt, is paying for the indulgence of the affluents and the industrial usage of fuels. The high income class (individuals and business) is well known for its tax evasive antics. Hence we have a situation, where the middle class man is marginalised and the elites get to enjoy a subsidy.
Most importantly, our subsidised fuel is still costlier than it is in US and UK. The PSU OMCs combinely make underrecoveries to the tune of Rs 1 lac crore a year on the sale of four major fuels. Still, the petrol costs Rs 47 a litre compared to Rs 35 a litre in US (at an exchange rate of Rs 47 a $). We need to look into the price build up of these products to analyse this discrepancy. In India, refinery products are priced based on Import Parity Pricing (IPP) formula. IPP means the total cost of importing a product from a reference location. It includes such components s as freight, insurance, import duty etc. The retail price is arrived at by adding to the refinery gate price, variuos excise and other duties, transportation costs and retailer's margins. We can see that the main differentiaters between fuel prices of different countries would be the duties and other levies imposed by the govt. The taxes account for app. 55% of the retail prices of petrol and diesel in India. Why does the govt have to tax the fuel so heavily? Is it because it can not make direct tax laws strong enough to cover the high income tax evaders?
Evidently, an Indian is still paying much higher for a subsidised fuel than others without a subsidy. The govt needs to rework the whole pricing mechanism and slowly move towards complete decontrol of the oil sector in the long term interests of its citizens. The issue needs to be addressed in its totality keeping in mind the interconnectedness of various aspects.
No doubt, the policy was aimed at insulating the economy from the volatility in the crude prices. But, is it the best way to protect the interests of the country? Are there any drawbacks of govt controlled fuel prices?
It has been observed that govt is always hesitant in its response to a rising trend in crude price. Apparently, pol
itical compulsions force the govt to hold back even on justified fuel price hike. As a result, the PSU oil marketing companies have to bear the loss running into thousands of crores of rupee. This loss is partly compensated by the govt in the form of oil bonds being issued to these PSU OMCs from time to time. Upstream oil companies like ONGC and GAIL share a portion of this subsidy burden. The rest is born by the PSU OMCs themselves. In short, the PSU OMCs are protected by the govt to keep the fuel prices under check in times of rising oil prices. This approach has made entry of private players into the business if oil marketing extremely difficult.They can not compete with govt dictated low prices, when their input cost is constantly moving up. Big names like Reliance, Essar and Shell had set up huge network of retail outlets throughout the country anticipating total deregulation of the oil sctor. They all are now forced to keep their fuel outlets shutin the absence of a level playing field. We all know how much important the entry of private sector is for any industry in terms of better productivity, advanced technology and nurturing talents. In the absence of external competition, the letharic PSU culture would thrive even more, while the govt still continuing to provide financial support.Secondly, if we dig a bit deeper into the issue, it turns out that it's the tax payer's money only, which is used to pay for the fuel subsidy. In a way, the salaried class, accounting for 70% of the direct tax collections by govt, is paying for the indulgence of the affluents and the industrial usage of fuels. The high income class (individuals and business) is well known for its tax evasive antics. Hence we have a situation, where the middle class man is marginalised and the elites get to enjoy a subsidy.
Most importantly, our subsidised fuel is still costlier than it is in US and UK. The PSU OMCs combinely make underrecoveries to the tune of Rs 1 lac crore a year on the sale of four major fuels. Still, the petrol costs Rs 47 a litre compared to Rs 35 a litre in US (at an exchange rate of Rs 47 a $). We need to look into the price build up of these products to analyse this discrepancy. In India, refinery products are priced based on Import Parity Pricing (IPP) formula. IPP means the total cost of importing a product from a reference location. It includes such components s as freight, insurance, import duty etc. The retail price is arrived at by adding to the refinery gate price, variuos excise and other duties, transportation costs and retailer's margins. We can see that the main differentiaters between fuel prices of different countries would be the duties and other levies imposed by the govt. The taxes account for app. 55% of the retail prices of petrol and diesel in India. Why does the govt have to tax the fuel so heavily? Is it because it can not make direct tax laws strong enough to cover the high income tax evaders?
Evidently, an Indian is still paying much higher for a subsidised fuel than others without a subsidy. The govt needs to rework the whole pricing mechanism and slowly move towards complete decontrol of the oil sector in the long term interests of its citizens. The issue needs to be addressed in its totality keeping in mind the interconnectedness of various aspects.
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