1. OIL PRICE DEREGULATION 1

2. DEREGULATION Decontrolling or deregulating the petrol prices mean that, the government will no longer be subsidizing petrol prices and the prices will be purely linked to international crude prices. In the case of diesel prices, though it will be only partially regulated- the reason being an attempt to avoid sudden spike in inflation. 2

3. Introduction Government of India deregulated the prices of petroleum products Decision was taken on 25 th June 2010 at EGOM (Empowered Group of Ministers) Decision was made on the basis of recommendation by Kirit Parikh Committee 3

4. Kirit Parikh Committee Recommendation 4 * the figures are based on prevailing prices in 2009-10

5. The Big Rider This is not the first attempt by the government to deregulate petroleum product prices. In April 2002, in an attempt to phase out subsidy on petroleum products, the government dismantled the administered pricing mechanism (APM) for pricing of Petrol and diesel To revise retail prices within a band of +/-10% of the mean of rolling average of the last 12 months 5

6. ECONOMY BEFORE DEREGULATION 6

7. APM and the oil pool account abolished in 2002 Government starts providing subsidies in the annual budget for petroleum products OMCs took control of adjusting prices Deficit’s started to grow from 2004 By 2006 the deficit was Rs. 400 billion for petrol and diesel 7

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9. Between 2002 and 2005 the prices of petrol increased 64% in India International prices increased over 140% The government issued government bonds to OMC’s in order to reduce under – recoveries in 2005-06 9

10. Reasons 1. To reduce the losses of oil marketing companies which are borne by:  Upstream oil sector companies like ONGC, OIL INDIA  Government: By issuing oil bonds  The residual amount is borne by OMC like HPCL, BPCL, etc. 2. To increase competition, since private companies do not receive financial support 10

11. The Ugly Truth Crude oil : $115/barrel Translates to Rs 33.20/ litre Final Petrol Price : Rs. 41.25/ litre The price we pay : Rs 63.77 * percentages are with respect to selling price. 11

12. Why high prices? Very high central taxes State government charge even higher taxes 75% of petroleum products are imported Inelastic demand for Oil 12

13. IMPACT OF DEREGULATION 13

14. Impact of Deregulation Increase in Prices Inflation Interest rate Public Finance Private players will re-emerge Improve Valuation of OMC 14

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16. Increase In Prices 16 Product Increase in Rs. Increase in % PETROL 15.77/ ltr32.9 DIESEL 3.09/ ltr8.1 LPG 85/ cylinder27.38 KEROSENE 5.51/ ltr 59.12

17. Inflation Impact Of Price Deregulation On WPI Index 17 PRODUCTS Current price in Rs. (since 26 th June, 2010) Hike in Rs. (since 26 th June, 2010) % increase Weight in WPI basket(bps) Impact on Inflation(bps ) Petrol 63.70 15.7732.9010944.04 High Speed Diesel 41.293.098.10467 95.27 LPG 395.358527.389129.17 Kerosene 14.83 5.5159.12 7344.31 Overall 740124.53

18. Inflation Although direct impact on WPI by deregulation is 124.53 bps but increase in fuel price will also increase price of other commodities which will result in increase in inflation by another 90 to 150 bps. 18

19. Public Finance Under-recoveries will reduce from Rs.770 billion to Rs. 530 billion As Petrol is fully deregulated so under-recoveries on petrol, ~10% will be fully wiped out. 19

20. Under-Recovery 20 ProductUnitUnder-Recovery (eff. 01-Sep-11) PetrolRs. / Litre0 DieselRs. / Litre4.57 PDS KeroseneRs. / Litre23.56 Domestic LPGRs. /Cylinder267.00 OMCs are currently incurring daily under-recovery of Rs.228 crore on the sale of Diesel, PDS Kerosene and Domestic LPG.

21. Fiscal Deficit Government in reducing Fiscal Deficit which is roaring around 11% (including off-balance sheet items like Oil Bonds, Subsidies, etc) 21

22. Interest Rates The deregulation has impacted the rise in overall fuel prices, which will increase the prices of products & food due to increase in transportation cost. As we have shown above the overall impact on WPI by 124.53 bps thus, higher inflation resulted in tightening of Monetary Policy. 22

23. Sudden Effect on the Share Market Exploration stocks, ONGC and Oil India rose by between 3.36% to 5.01%, 23

24. Improve Valuation of OMC Due to increase in fuel price the profit of Oil marketing companies will improve which will result in higher Earning per share. 24

25. Private Players Will Re-emerge 25

26. CONCLUSION The overall de-regularising effect will be helpful to Government Reduction in subsidies However, absence of: o The timeline of the diesel price deregulation, o The frequency of change in petrol price, and o Pricing limit (band) for petrol price takes some sheen off the decision. 26

27. THANK YOU 27