Impact of deregulation of petroleum pricing on Indian economy

Abstract

The 11th five year plan based on the IEP guidelines states that the ministry and companies will look for opportunities in Europe and Asia, to develop India as an export hub. The government is trying certain reforms in the downstream sector, one of which is establishment of PNGRB, but they have clearly not been enough. The oil crisis in 1970s changed the pricing system from import parity in pricing to a more regulated APM (administered pricing mechanism). India continued to have Administrative Pricing Mechanism (APM) for controlling the prices of petroleum products, till 2002 and then it was replaced by the trade parity pricing mechanism. This new regime was also discontinued in 2004, as the government again started looking for ways to control the prices and keep them artificially down. There is need for a new pricing regime precisely because of the four following reasons; 1) India has become a globally significant oil consumer which makes it important to have a sustainable pricing mechanism, 2) India has become increasingly Import Dependent so domestic market is affected by international prices which had been volatile over the years. The increasing and volatile prices make it important that Indian prices align with them.3) OMCs have been suffering from under-recoveries due to the artificial controls over the prices.4) until prices are rationalized and the industry becomes profitable there will no investments in the sector. In 2006 Rangarajan committee recommended the deregulation of prices of oil deregulation and reduction of taxes in the oil sector. Moreover it recommended distribution of kerosene through PDS only for people BPL although no guidelines were given as to how such a goal could be achieved. The committee's recommendations were not implemented. In 2009 Kirrit Parekh Committee was formed after oil prices rose to 140 $ /bbl. Kirrit Parikh Committee recommended deregulating oil and diesel prices and concluded that the public would be able to absorb the extra burden put on the due to higher prices and that the increase in inflation should be compared and contrasted with the effects on the economy of increasing budget deficit. It recommends limited deregulation in LPG and Kerosene and talks of targeting the needy families using the UID system and subsidising only them. The Kirrit Parikh Report chooses to avoid the tax issue all together although it has very important implication on the pricing of oil. The taxes on oil are disproportionately high in India. If all companies were oil companies the net subsidies are less than the net gains from tax for the government exchequer. So, on the whole there are no subsidies for the oil sector. We believe deregulation of prices with a reduction in taxes or a rationalization of taxes, where the top 15% of the population pays more, would have been a better approach. Moreover the Kirrit Parikh report mentions that import parity should be used to calculate OMC recoveries which are in contradiction to what Rangarajan Committee recommended. We believe import parity pricing inflates the recoveries more than their real value and so the method recommended in Rangarajan Committee report (weighted price of imports and exports) would have been a more fair indicator.