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A theoretical formulation

It is not surprising that the report of the high-powered committee, appointed by the Prime Minister to go into the financial position of oil companies, should have met with opposition. Headed by Planning Commission member B.K. Chaturvedi, the panel has made some far-reaching proposals which, if only they could be implemented, would pave the way for a more equitable and transparent methodology for the pricing of petroleum products — a process that, equally significantly, will be kept outside the ambit of government decision-making. Ever since the administered price mechanism was abandoned in April 2002, the government has been grappling with some temporary and ultimately futile strategies to contend with the extraordinary rise in global oil prices. While the domestic consumers of transportation and cooking fuels continue to be subsidised, the government has been unable to work out a method of apportioning the subsidy burden equitably among all the parties in the petroleum value chain without damaging the financial health of the oil companies.

Few would fault the panel’s approach to finding durable solutions for vexatious issues, notably “under-recoveries” by oil marketing companies, an opaque term that has become the benchmark for distributing the subsidy burden. Currently, under-recoveries are worked out on the basis of import substitution. Disapproving of this method, which takes into account certain notional elements of costs — costs that are not incurred by the oil marketing companies — and thus inflates under-recoveries, the panel favoured the adoption of export parity pricing. Switching over to this method, however, would lead to higher retail prices, which the panel recommends be passed on to consumers in stages over a definite time frame. It is these specific proposals — a monthly hike in the retail prices of petrol and diesel by Rs.2.50 and 75 paise respectively for specified periods, a differential price for petrol, and a gradual reduction in the supply of subsidised LPG cylinders — that have become the focal point of opposition to the report. The critics do have a point or two. With inflation running high and in an election year, it will be impossible to hike fuel prices. Another of its key recommendations, the imposition of a special crude oil tax on ONGC and Oil India and certain other producers, does not seem particularly onerous for the upstream companies and, in any case, it will remain only as long as subsidies continue. In theory, the report seems to lay out a well-considered road map for petroleum products pricing but many of its suggestions will be politically difficult for any government to implement.

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