Financial Daily from THE HINDU group of publications
Tuesday, Feb 28, 2006
Industry & Economy
`Rapid, bold policy responses needed to manage oil crisis'
Petro-product pricing crucial to fiscal health
New Delhi , Feb. 27
Concerns on the price of petroleum products and financial health of the Government-owned oil marketing companies have been reflected in the Economic Survey 2005-06.
The Survey, which was tabled in Parliament today and is also supposed to be an indicator of future Government policies, said that management of the lingering oil crisis requires rapid and bold policy responses with a firm resolve.
"In the context of public finance, appropriate pricing of petroleum products assumes significance, particularly with the petroleum marketing sector being dominated by public sector oil companies," it said.
"With medium-term prospects of crude prices remaining high, the continuance of incomplete pass-throughs is not sustainable without serious consequences to the financial health of oil companies and the Exchequer."
Spiralling international petroleum prices not only create a pressure on Budgetary resources directly and indirectly through losses of oil PSUs, but have a debilitating effect on the performance of the industrial sector as a whole.
The Government had raised the price of petrol and diesel by Rs 2.50 and Rs 2 a litre respectively with effect from June 21, 2005 in response to the rising international prices of these products.
As the increase continued to persist, the prices of petrol and diesel were further raised by Rs 3 and Rs 2 a litre respectively with effect from September 7, 2005.
However, the prices of cooking gas (LPG) and kerosene sold under public distribution system were left unchanged.
Oil companies are losing Rs 170.32 on the sale of every LPG cylinder and Rs 12.96 on the sale of every litre of kerosene through PDS.
In order to compensate the oil marketing companies for mounting under-recoveries, over and above the amount allowed as direct subsidy, Budget 2005-06 provides an additional Rs 5,750 crore for oil bonds.
The estimated under-recoveries more than doubled from Rs 9,274 crore in 2003-04 to Rs 20,146 crore in 2004-05, and continue to rise, the Survey said.
"The movement towards market-determined pricing in hydrocarbon sector has floundered, pending the resolution of the issue of subsidy in domestic LPG and PDS kerosene."
Besides, the "perverse incentives for fuel switching and distortions arising from differential tax rates" need to be addressed, it added.
Customs and excise duties on petroleum products account for about 40 per cent of the total Customs/excise collections of the Government.
With an equally high sales tax, ranging from 12 per cent to 38 per cent, the tax component of the retail price of petrol and diesel remains high, the Survey said.
"This has been further compounded by the duty differential across products, including on the basis of end-use, leading to problems of fuel switching and other malpractices."
The issue of harmonising State levies on petroleum products is being deliberated by the Empowered Committee of State Finance Ministers on VAT.
The average price of basket of crude oil imported by Indian refiners increased by 44.5 per cent from $37.3 a barrel in April-November 2004 to $53.9 in April-November, it added.
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