Price petro-products on trade-parity basis?

The inability of oil marketing companies (OMCs) to pass on the burden of increasing international oil prices to domestic consumers has resulted in their profit levels eroding from nearly Rs 11,000 crore in 2003-04 to a negative of nearly Rs 3,000 crore in the first nine months of 2005-06. The current subsidy on kerosene has been estimated at Rs 15,000 crore while that on LPG is Rs 11,000 crore. At the same time the Centre is struggling to fulfil its commitments under the Bharat Nirman Programme. Contrary to the belief that LPG and kerosene are fuels of the poor people, 76% of the LPG subsidy goes to urban consumers and 40% of the total LPG subsidy benefits the top 6.75% of the population by income. Kerosene, on the other hand, is irrefutably being used for adulteration to the extent of nearly 40%. The balance 60% could be reaching the targeted population but again not for the targeted end-use. This kerosene is either being used for providing very poor quality light in rural areas or for running diesel gensets to produce electricity for irrigation. The Rangarajan Committee needs to be lauded for making several bold suggestions on the pricing of various petroleum products. These suggestions could substantially reduce the subsidy burden of the government if they can muster the courage to implement the same. Trade parity pricing, however, if applied uniformly, could result in an inequitous impact on different companies. One also needs to recognise that the type and quantity of product being exported/imported may vary from time to time and is a function of demand. Additionally, most of India?s oil imports are in the form of crude and not products. As such, the government should simply lay down a guideline that says that in the event of the country being a net exporter/balanced producer of a product the export parity price (f.o.b) would apply as a cap while if the country is a net importer then the import parity price would apply, again as a price cap at the refinery gate. It is important, however, to redefine import parity to cover just the c.i.f price of the product plus the customs duty and nothing more. Equally important is the petroleum regulatory Bill, pending in Parliament for several years, which must be enacted and the petroleum regulator given the responsibility of ensuring transparency in pricing. The practice of freight equalisation is again counter-intuitive to efficiency. As such, oil companies should be free to reflect cost of transport, and their comparative locational advantages, in the price of the product. Any disadvantages felt by remote and hilly areas could be offset through the sales- tax mechanism and central transfers. Once again, the role of the regulator is important in ensuring that companies do not take advantage of either localised monopolistic situations or of informational lacunae. As far as the pricing of LPG and kerosene are concerned, once again the Rangarajan Committee is right in suggesting the need for targeting of subsidies. However, a recent TERI report had highlighted the fact that most of the kerosene consumed in the country is used for providing low quality lighting. This lighting demand could be met in a more targeted manner and more efficiently through the provision of subsidised solar lanterns. Additionally, once the Bharat Nirman targets of 100% electrification of all households is met, kerosene use for lighting would become redundant. As far as cooking energy needs go, if the domestic pricing distortions are removed, the government could consider encouraging the use of LPG ? it is cheaper internationally than kerosene, cleaner and is less prone to leakages. The TERI report suggested that subsidies, to the targeted populations, can be provided as a direct subsidy through a smart card while pricing the cylinder at its full cost. In sum, the government needs to take a holistic approach to solving the problems that are threatening the oil sector in the country.