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Oil Ministry favours realigning fuel prices to phase out subsidies — Final decision on pricing after Rangarajan panel report

Richa Mishra

According to the sources, international product prices, especially for liquefied petroleum gas (LPG), kerosene and diesel, have increased much faster than crude prices.

New Delhi , Dec. 25

TO attain import parity on domestic petroleum product pricing, particularly cooking gas and kerosene, the Petroleum Ministry has found the option of realigning domestic prices gradually with the objective of phasing out subsidies on these two products as the most "practical."

The Petroleum Ministry recently presented before the Energy Coordination Committee, headed by the Prime Minister, Dr Manmohan Singh, three options to cushion the impact of high volatility in international oil prices. Out of the options - maintaining status quo, realigning domestic prices to import parity in one single adjustment or realigning domestic prices gradually in line with the objective of phasing out subsidies by 1 April 2007 - the Ministry sources said the third option appeared to be the most practical.

However, a final decision on pricing will be taken only after the Dr C. Rangarajan-led inter-ministerial committee submits its report. This committee has been asked to formulate a long-term policy on pricing and taxation of petroleum products.

The Petroleum Ministry is also pushing for the release of oil bonds in the full amount of just under Rs 16,000 crore to compensate the public sector oil marketing companies for the mounting revenue losses suffered by them.

The Finance Ministry has so far made provisions to issue bonds of the face value of Rs 5,750 crore only, and this has been included in the second supplementary demands for grants 2005-06 passed by Parliament recently.

According to the sources, international product prices, especially for liquefied petroleum gas (LPG), kerosene and diesel, have increased much faster than crude prices. While the domestic petrol and diesel prices are broadly comparable with those of the neighbouring in South Asian countries, prices of PDS kerosene and domestic LPG are much lower, which is affecting the profitability of marketing companies. To attain import parity, kerosene prices would have to be raised between Rs 11 and Rs 12 per litre and LPG prices by between Rs 138 and Rs 227 per cylinder of 14.2 kg. Over the last three years, under-recoveries have risen from Rs 9,274 crore to nearly Rs 40,000 crore.

In 2004, it was decided that the consumers, the Government and the oil companies should equitably share the burden of increase in international prices. Accordingly, from 2003-04 onwards, a subsidy sharing mechanism has been drawn up in which upstream and downstream companies share the balance equitably, after taking into account the subsidy provided for in the budget.

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