1. India Energy Conference 2008 Session 4 - Product Pricing & Subsidies Ruchika Chawla Associate Fellow 3-4 October 2008

2. Multiple Objectives of Pricing System Providing adequate incentive to oil companies Providing resources for the government Promoting efficient consumption choices Minimising impact on consumers

3. Petroleum Pricing History APM Pricing System (1975-1998) Dismantling of APM (1998-2002) Post APM dismantling (2002-present)

4. Dismantling of APM proposed… Prices of all petroleum products except MS, HSD, ATF, PDS Kerosene, Domestic LPG to be de-controlled (April 1998) Pricing of MS & HSD to be de-controlled (April 2002) There was fortnightly revision of the MS & HSD prices by the OMCs in consultation with the GoI Subsidy on PDS Kerosene and Domestic LPG to be reduced

5. Post Dismantling of APM: the Current Situation Proposal Implementation Status Prices of all petroleum products except MS, HSD, ATF, PDS Kerosene, Domestic LPG to be de-controlled  Pricing of MS & HSD to be de- controlled X There was fortnightly revision of the MS/HSD prices by the OMCs in consultation with the GoI X Subsidy on PDS Kerosene and Domestic LPG to be gradually reduced  / X

6. Inadequate Price Increases… 1% increase 23-30% increase 150% increase 180% increase Source: IOCL website Inadequate and ad-hoc price revisions

7. Impact on Indian Economy High costs of inaction –Trebling of under recoveries from Rs 20146 crores to Rs 77123 crores in 3 years –Under recoveries of oil companies 51% of fiscal deficit Government committed to reduce its gross fiscal deficit to 3 % of GDP by 2009 –Current GFD 4% of GDP (2007-08) Total oil subsidies are already estimated as hovering around 2-3% of GDP with oil prices at about 80$/bbl! –90-95% unaccounted for in budget - borne by oil companies as under-recoveries GFD adjusted with under-recoveries – 6% of GDP!! Sources: Petroleum Planning and Analysis Cell and the Reserve bank of India

8. Impact on Oil Companies OMCs incurring losses of Rs.400 crore/day on sale of petrol, diesel, Kerosene & LPG* –Per unit under-recovery* Diesel - Rs.13.69/litre Petrol - Rs 6.31/litre PDS Kerosene - Rs 31.39/ litre LPG cylinder - Rs 312.58/ cylinder Increasing exposure to debt for the oil companies Crowding out private sector participation - based on average price for second fortnight of August 2008 Source: Economic times (31 st August 2008)

9. Impact of Lopsided Pricing Increased market distortions At high crude oil prices, subsidized diesel cheaper than FO prices –Industries and power plants shifting from FO to diesel –Increased demand for diesel  Increasing imports for diesel  increased pressure on OMCs Sub optimal utilization of petroleum products

10. MS – HSD pricing High incidence of taxation in the MS and HSD pricing –45% in the petrol retail price –25% in the diesel retail price Steady movement from ad- valorem to specific duties Sources: Petroleum Planning and Analysis Cell, Reserve Bank of India Particular Revenue from petroleum sector (2006-07) Total govt revenue% share Customs1004386327.2411.63% Excise Duty58821117612.7650.01% Corporation Tax12153144318.38.42% Total Tax Revenue81017353182.2722.94% Total revenue to centre from pet sector93802658240.2514.25%

11. Decreasing share of budgetary subsidies …. 94% increase in under – recoveries Only 10% increase in budgetary subsidies Source: PPAC and Basic Statistics (MoPNG)

12. Kerosene and LPG Subsidies Kerosene –Subsidized kerosene siphoned off to adulterate diesel –Less than 2% of rural households use kerosene for cooking –55% rural households use for lighting but is an inefficient source of lighting LPG –76% subsidy goes to urban areas –40% of subsidy enjoyed by top 6.75% total population Source: TERI Publication ‘Petroleum pricing in India: Balancing equity and efficiency, November 2005,

13. Challenges Need to move away from ad-hoc price revisions Need to move to full cost pricing at the earliest Need to adopt targeted subsidy delivery mechanism

14. Thank You