People's Democracy

Irrational And Arbitrary Pricing Of The Petroleum 
Products By The Centre

Speaking in Rajya Sabha on December 8, 2004 Dipankar Mukherjee criticised the Petroleum pricing policies of the central government. This write up is largely based on his speech.

DURING October 1998, the petrol was costing Rs 23 per litre, diesel was Rs 10 per litre, kerosene was Rs 2.58 per litre, LPG was Rs 135 per cylinder, and, ATF was Rs 13.29 per litre. In January, 2004, before this government came to power, MS petrol had gone up from Rs 23 per litre to Rs 33 per litre, the diesel had gone up from Rs 10 per litre to Rs 21 per litre, the kerosene had gone up from Rs 2.58 per litre to Rs 9 per litre, and fortunately, till now, it stands at Rs 9 per litre. The price of LPG went up from Rs 135 per cylinder to Rs 241 per cylinder.

That is the scenario where we may start. We shall now explain why the present petroleum pricing, present burden on the consumer is avoidable. "This burden is because we have changed over from the earlier Administered Pricing Mechanism to import parity system."

What does the import parity mean? One is happy that the minister has, at least, pointed out that there are the under recoveries of the public sector oil companies. Some of the big economic newspapers have been talking of losses; and many people ask about the losses that the public sector oil companies are suffering. It is not only the public sector oil companies which are involved in the oil industry. The biggest refinery in this country is not being run by the government; so, it should not even be subsidised. The major point here is: what does the import parity mean? Has the production cost, the refinery cost increased within the country? Whether the production cost of crude has increased. The answer is no. We are producing 30 per cent ourselves, and are importing 70 per cent. The global price fluctuations are there and that has been indicated. But, so far as refineries are concerned, the country is hundred per cent self-reliant.

We are refining our own oil. What is the refining cost? We are not talking of the crude cost, or of the production cost; We are talking about the average refining cost of the refineries. Starting from one million tonnes refining at Digboi refinery, and, coming to 33 million tonnes refining at Reliance's Jamnagar refinery, what is the average refining cost? As per reliable information, the average refining cost of IOC refineries — the figure is not an official one, let the minister clarify if it is wrong — is roughly about 52 paise per litre. One can safely assume that in the biggest refinery of this country — because it is the most technical and modernised refinery — this cost will be less than 30 paise per litre.

What is the refining margin? Refining margin is the margin on which a refinery earns its profit. As far as the refining margin of IOC is concerned, according to the data available on its website, it is US $8 per barrel. One can imagine that if IOC’s margin is US $7 – 8 per barrel, then the biggest refinery is having a margin of around US $10 – 12 per barrel. The conversion factors have been given, and, according to Mukherjee’s calculation, it comes to about Rs 3 to 4 per litre. But does this international price rise that has been shown here give the government a right to determine the prices of the petroleum products based on the import parity, which was decided in 1997.

"Does the international crude price hike give the right to the refiners in this country to hike refining margin to reap the refining bonanza. The refining margin increased from $2.5 per barrel to $8 per barrel?" Without naming the company Mukherjee mentioned that there is a company which specifically told, "in this quarter, that means, from April to June 2004, the refining margin of the company has gone up to $7 per barrel compared to $5 per barrel last year." It is not a public sector refinery; it is a private sector refinery. Mukherjee asked what is the magic mantra by which the refining margin has increased by $3 within one year or just three months? The only argument is that ‘because the price of crude is higher today.’ This is the basic reason why the refining margin has gone up.

He felt that the system of calculating import parity price of products is wrong. He asked to know what type of decisions, which committee, which experts had decided the basic concept of fixing the price of import parity for the products, whether any committee was appointed by the earlier government when they dismantled this pricing system. "If we go through the earlier history of the petroleum industry in this country, import parity pricing is not a new thing. It was there earlier also. It was there upto 1976 when it was replaced by the administered pricing system. There were two-three committees which had gone into the parity of pricing."

In the import parity system, there are interesting facts. From November itself, the price of diesel has been $50 per barrel, which is the global price. The crude price is $38. That means, for conversion of 38 dollars crude outside, there is a conversion cost of 12 dollars. When one calculates the price for a consumer, it will thus be 50 dollars plus the transportation cost plus 10 per cent import duty plus insurance plus the ocean loss. All this can be computed. Thus there is no loss. "We are not processing in production. It may be called under-recovery. People are calling it a loss. Some of those knowledgeable industry people in media say that it is a loss. What is the loss? Is it a production loss? Is it a refining margin loss? No, this is a computed cost. When you are calculating the conversion cost from 50 dollars upto this, you are putting 10 per cent import duty? Even in diesel, it is 10 per cent or 15 per cent", stated Mukherjee.

UNSCIENTIFIC PRICING

So, the first major point is that this basis of fixing the prices of petroleum products, based on import parity, has not been done scientifically. Secondly, it has not been done through any system of committee but purely on an ad hoc basis. The CPI(M) had expressed apprehension that this has all been done to specifically benefit the biggest refiner of this country. Some people are now shedding tears for public sector oil companies. Those who are so keen on privatising, are now shedding crocodile tears. What will happen to the public sector oil companies? Public sector oil companies are, at least involved in marketing and marketing margins are coming down. But what about the refiner? So, the first question should be: What is the basis of fixing this Import Parity Price for the products as a whole? Thirdly, it is a fact that some export duty drawback incentive is given to some exporters? Those who export petroleum products are not generally involved in marketing within the country. They export refined petroleum products. If so, what was the quantity last year? And what is the quantity this year? How much loss is involved? Why that figure is not coming out?

"Not only this standing committee but the standing committee of 1992 had also given certain recommendations. One is the withdrawal of cess. Now, this is an issue where irrespective of parties, recommendations of the standing committee from 1991 onwards told in uncertain terms that the cess of Rs 900 per tonne, which was increased to Rs 1800 per tonne by the finance minister in 2002, would be charged under the Oil Industrial Development Act, 1974. And through OIDA, this money was supposed to go for petroleum development. Can the minister clarify whether the petroleum ministry has got any money out of that cess for the development of oil since 1992 onwards, till now? No, it has gone into the Consolidated Fund of India. According to estimates, this figure is Rs 5,400 crore. About Rs 12,000 crore have been collected this year, but not a single penny has gone to the petroleum sector. This has gone into the Consolidated Fund of India. This cess was meant for the development of petroleum sector.

Why a cess has to be charged on oil produced by ONGC and Oil India if it is not to be used for petroleum sector development?

"Let it be cleared first. Firstly, I did not say that import parity price was fixed in 1997 in all of a sudden, in a hurry, without any Committee. I did not say that. I said it was fixed in 1997 but in this implementation, when you come to 2002-03 and right now also, this ministry or the earlier ministry, they could not go to the market, they could not dismantle in totality because they found that they cannot do it. Some economists can sit and take a decision, but those who go for the votes there, those who go to the people, they cannot go there and say that, 'Today, I will sell kerosene at this rate because some committee has told.' What I said was, the fixing norm of pricing of petroleum products on import parity was done in a hurry. How the price of diesel will be fixed on import parity? How have you fixed it? Which Committee has done it? And this is what requires a revisit. This is where I said market fundamentalism is involved because if I am a consumer, why should I give the conversion cost twice? Imported, yes. You have the crude. You have already converted the cost, that conversion cost of 12 dollars plus you add something where you put a duty component also and then you fix up this price. What is the refining bonanza, what is the refining cost? You tell me, what is the refining cost in the private company and what is the refining bonanza?" asked Mukherjee.

Coming to the cess part, he said "I would like to enquire whether the cess is supposed to be reviewed, whether the cess can be withdrawn or not. This was the recommendation of the standing committee. That is the first thing. Second issue is the subsidy. When you are collecting tax from some people and also giving some relief, you should not call it a subsidy. This is standing committee’s view.

"Now three months’ period has gone. What are the comments and observations of the ministry on the recommendation of standing committee on withdrawal of customs duty on kerosene and LPG? What is the view of the government on the recommendation of the standing committee that the excise duty on so-called subsidised products of kerosene and LPG should be withdrawn? What is their decision on the recommendation of the standing committee that with regard to ad valorem duty structure on different taxes, you should have a specific component of duty on such products? That means, based on the duty on price, the tax also increases. Instead of that, you should have a specific component of duty on such products so that all of a sudden, there is no bonanza. That can make a lot of change in the prices of petroleum products, and you can roll back. What is the response of the government to the specific recommendation of changing the ad valorem duty structure to fix specific duty structure in respect of both, the sales tax as well as excise duties?

"The third point is, whether the government is now thinking of a cap on the refining margins because, in the power sector also, there is a cap of 16 per cent return on investment.

"Lastly, before making any further price revision, whether a committee would be specifically constituted right now, with a two months’ time period, to see that the pricing structure is streamlined. Forget about duties. Everyone knows about that part. It should not be some sort of a feudal benevolence that someone says that I have reduced 2 per cent duty is in excess. What is the fuel component and non-fuel component in the retail selling? The figure which I had given to the prime minister is Rs 5,400 crores. Reduction in sale cess as well as the export duty, duty drawbacks, I am sure would take care of the under recoveries and the price rise is not necessary.

"I am asking the minister to clarify if resource mobilisation is the only problem which hinders this government to roll back the prices. Oil is the considered to be best source for resource mobilisation through cess and duties. This can be passed on to the finance minister. How ever the total amount recoverable on account of the duties on corporate tax, customs duties, income tax and central excise duty is much larger. On 31.3.1998, the outstanding arrears were Rs 47,000 crore.

"In 1999, it became Rs 52,000 crore; in 2000-01, Rs 62,000 crore. In 2002, it was Rs 87,000 crore. Rs 87,000 crore corporate duty, customs duty, excise duty! And for 2003-04, it could be one lakh crores of rupees. If amount recoverable is so large then getting Rs 10,000 crores or Rs 15,000 crores from these taxes must not be a problem. If this government does not want to be corporate friendly, then it should mobilise resources by collecting arrears of taxes", so saying concluded Dipankar Mukherjee.