“Report of the Expert Group to advice on pricing methodology for Diesel, Domestic LPG and PDS Kerosene”

The Government had constituted an Expert Group to advice on pricing methodology for Diesel, Domestic LPG and PDS Kerosene under the chairmanship of Dr. Kirit S. Parikh (Former Member, Planning Commission). The report of the Expert Group has been submitted to the Minister of Petroleum & Natural Gas on 30^th October 2013.

The snapshot of the recommendations made by the Expert Group in the report is as given below:

1.              Need for robust refining sector in India

India, being one of the largest energy consuming countries, needs to maintains self-sufficiency in the refining sector in future. Therefore, the pricing policies should be geared in order to ensure sufficient returns to the refineries in the country for long-term sustainability of the petroleum sector and to ensure energy security of the country.

2.              Pricing mechanism

                                I.      The expert group noted that there is no single or unique formula which can represent the correct method for domestic prices in India that would remain unaffected from the distortions for the economy. Therefore, the best course of action is to free the market from price controls at the earliest.

                              II.      In view of the significant gap between the present administered prices and the international prices, the committee has spelt out the arrangements that may prevail in the interim till the best course of action is implemented.

3.              Diesel

                                I.      The Expert Group recommended the continuation of TPP as per current policy as the government has already decided to eventually free diesel price, which, even if modified, will not solve the problem of mounting under-recoveries incurred on sales of controlled products, mainly due to high international crude prices and depreciation of Indian rupee.  

                              II.      The Expert Group recommended that the Government should take steps to pass on the impact of rise in price of diesel to consumers and move rapidly towards making the price of diesel market determined.

                            III.      The Expert Group further recommended that diesel price should be raised by Rs. 5/ litre with immediate effect and the balance under-recovery should be made up through a subsidy of Rs. 6/litre to PSU OMCs. The subsidy on diesel should be capped at Rs. 6/ litre which would imply freeing of price of diesel beyond this cap.

                           IV.      However, any rise in the gap between domestic and international prices beyond Rs. 6/litre should be made up by corresponding increase in the price of diesel in the domestic market by the OMCs. If the gap falls below Rs. 6/litre, either the prices should be reduced or the subsidy to be provided should be reduced. The second option has been recommended by the group as that would lead to decline in subsidy over time. In the future, oil companies should be permitted to revise the prices above the subsidy cap (in line with the changes in the international prices and other costs elements) on their own. 

                             V.      The expert group suggested that the fixed subsidy of Rs. 6/litre should be reduced gradually and finally removed through regular monthly downward revisions in the cap on subsidy and corresponding increase in the price of diesel over the next one year.

4.              PDS Kerosene

                                I.      The expert group recommended that the DBTK scheme for Direct Transfer of Subsidy to BPL families throughout the country should be fast-tracked and completed within the next two years. Hence, PDS kerosene should be priced at full market price and the benefit of the subsidy should be given to the deserving consumers i.e. BPL families, through direct cash transfer mechanism.

                              II.      Till the implementation of DBTK, the expert group recommended that the price of PDS Kerosene should be increased by Rs. 4/Litre immediately and thereafter the price of PDS Kerosene should be revised from time to time at least in line with growth in the per capita agriculture GDP.

                            III.      Allocation of PDS Kerosene should be reduced with spread of rural electrification and increased use of LPG and PNG for cooking.

                           IV.      Since Kerosene is neither exported nor imported and also since there is no custom duty on PDS Kerosene, it’s pricing may continue to be based on IPP.

5.             Domestic LPG

                                I.      The Expert Group recommended that the limit for subsidized cylinders should be reduced from the present 9 to 6 cylinders per annum to each household and the DBTL scheme be restricted to identified families based on an exclusion criteria.

                              II.      The DBTL scheme should be implemented throughout the country for Direct Transfer of Subsidy to identified families within next one year.

                            III.      The price of subsidized domestic LPG should be raised by Rs. 250/cylinder immediately and the balance subsidy be phased out over the next 2 years through gradual price increase.

                           IV.      Piped natural gas to homes should be actively promoted in urban areas.

                             V.      As the country is heavily dependent on imports of LPG, the methodology of fixing refinery gate price of Domestic LPG should continue on IPP basis.

6.           Upstream Contribution

                                I.      The Expert Group recommended following contribution formula for ONGC & OIL from the financial year 2014-15 onwards:

Crude price	% Contribution of Upstream companies
Crude price <$80/bbl.	40% of crude  price
Crude price $80 – 120/bbl.	40% + 0.25% for each $1/bbl. increase beyond $80/bbl.
Crude price>$120/bbl.	50% of  crude price

                                   Source: Report of the Expert Group on pricing methodology for Diesel, Domestic LPG and PDS Kerosene

                              II.      Keeping in view the current high level of under-recoveries, the contribution from ONGC & OIL during the financial year 2013-14 may be retained at the existing level of $56/bbl. of crude oil produced.

                            III.      As regards GAIL, with the reduction in availability of APM gas it is recommended that GAIL’s contribution should not exceed the gross   profit made on sale of LPG (after allowing a reasonable profit amount to be retained by GAIL).

                           IV.      Further, after adjusting the upstream contribution, the balance amount of under-recovery on Diesel, PDS Kerosene and Subsidized Domestic LPG should be fully compensated to OMCs by providing cash subsidy from the Government budget until the prices are fully deregulated and subsidy on these products is eliminated.

7.             Operational and procurement efficiencies

The expert group recommended that OMCs should be given the freedom to procure crude oil and petroleum products through a mix of long term contracts and spot purchases from all available sources. This can be accomplished without compromising transparency and accountability by working out mechanisms in consultation with the CVC.

Warm regards,

Dr. S P Sharma

Chief Economist