Pricing of petroleum products in India: Cairn India Ltd.

Abstract

Oil and Gas Sector in India accounts for about 15 % of the country’s GDP. The increasing demand for petroleum products in the country has led to a steady increase in crude oil prices causing a concern for both consumers and the government. In India , petrol prices are decontrolled and the prices of Domestic LPG and PDS Kerosene are decided by the Government. Though the Government promised the Oil Marketing Companies regarding its decision of decontrolling the Diesel price also, it is partially decontrolled as of now. This report is divided into three parts. In the first part, we study the different pricing mechanisms that have been followed in the sector, and the impact of the present pricing mechanism on Business, Consumer and Government. Initially the concept of parity pricing is presented along with the comparison of different parity prices and the resulting under recoveries due to each type of pricing. The advantages of each of the parity pricing methods are also analyzed. The contribution of taxes in the pricing policies of the country is seen and the impact of the same is studied. In the second part, we analyze the impact of a marginal hike in the prices of the price sensitive petroleum products on the Fiscal burden faced by the government due to petroleum subsidies. The impact of price rise on Wholesale price index, Credit rating, price sensitivity with respect to other essential goods and services also are studied. In the third part, we try to understand what impact the subsidy given by government to the customers and Oil marketing companies, for petroleum products, have affected the nation’s finances. This analysis is done through understanding the impact of price rise and the subsidy on Public sector upstream companies, Public sector downstream companies and Private Oil refineries. Along with this we study the burden sharing mechanism that is in existence for compensating the Oil Marketing companies for their under recovery losses. In the final part, the need for targeting the subsidies and technological improvements in effective delivery of subsidies to the consumers is studied and recommendations are provided for the government to manage the petro subsidy mess it is currently facing. Effective technology based recommendations where the government can save a portion of the fiscal burden are provided. It includes Implementing the use of a fuel card, Charging a cess on Insurance for Diesel car owners, Increasing the Export parity component in the Trade Parity price, Devising a burden sharing mechanism for under recovery compensation for the Oil marketing companies are provided. These recommendations if implemented would result in reduction on the fiscal subsidy burden on the Government.