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India Energy Conference 2008 Session 4 - Product Pricing & Subsidies

India Energy Conference 2008 Session 4 - Product Pricing & Subsidies. Ruchika Chawla Associate Fellow 3-4 October 2008. Multiple Objectives of Pricing System. Providing adequate incentive to oil companies. Providing resources for the government. Promoting efficient consumption choices.

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India Energy Conference 2008 Session 4 - Product Pricing & Subsidies

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  1. India Energy Conference 2008 Session 4 - Product Pricing & Subsidies Ruchika Chawla Associate Fellow 3-4 October 2008

  2. Multiple Objectives of Pricing System Providing adequate incentive to oil companies Providing resources for the government Promoting efficient consumption choices Minimising impact on consumers

  3. Petroleum Pricing History APM Pricing System (1975-1998) Dismantling of APM (1998-2002) Post APM dismantling (2002-present)

  4. Dismantling of APM proposed… • Prices of all petroleum products except MS, HSD, ATF, PDS Kerosene, Domestic LPG to be de-controlled (April 1998) • Pricing of MS & HSD to be de-controlled (April 2002) • There was fortnightly revision of the MS & HSD prices by the OMCs in consultation with the GoI • Subsidy on PDS Kerosene and Domestic LPG to be reduced

  5. Post Dismantling of APM: the Current Situation

  6. Inadequate Price Increases… 180% increase 150% increase 23-30% increase 1% increase Inadequate and ad-hoc price revisions Source: IOCL website

  7. Impact on Indian Economy • High costs of inaction • Trebling of under recoveries from Rs 20146 crores to Rs 77123 crores in 3 years • Under recoveries of oil companies 51% of fiscal deficit • Government committed to reduce its gross fiscal deficit to 3 % of GDP by 2009 • Current GFD 4% of GDP (2007-08) • Total oil subsidies are already estimated as hovering around 2-3% of GDP with oil prices at about 80$/bbl! • 90-95% unaccounted for in budget - borne by oil companies as under-recoveries • GFD adjusted with under-recoveries – 6% of GDP!! Sources: Petroleum Planning and Analysis Cell and the Reserve bank of India

  8. Impact on Oil Companies • OMCs incurring losses of Rs.400 crore/day on sale of petrol, diesel, Kerosene & LPG* • Per unit under-recovery* • Diesel - Rs.13.69/litre • Petrol - Rs 6.31/litre • PDS Kerosene - Rs 31.39/ litre • LPG cylinder - Rs 312.58/ cylinder • Increasing exposure to debt for the oil companies • Crowding out private sector participation • - based on average price for second fortnight of August 2008 • Source: Economic times (31st August 2008)

  9. Impact of Lopsided Pricing • Increased market distortions • At high crude oil prices, subsidized diesel cheaper than FO prices • Industries and power plants shifting from FO to diesel • Increased demand for diesel  Increasing imports for diesel  increased pressure on OMCs Sub optimal utilization of petroleum products

  10. MS – HSD pricing • High incidence of taxation in the MS and HSD pricing • 45% in the petrol retail price • 25% in the diesel retail price • Steady movement from ad-valorem to specific duties Sources: Petroleum Planning and Analysis Cell, Reserve Bank of India

  11. Decreasing share of budgetary subsidies …. 94% increase in under – recoveries Only 10% increase in budgetary subsidies Source: PPAC and Basic Statistics (MoPNG)

  12. Kerosene and LPG Subsidies • Kerosene • Subsidized kerosene siphoned off to adulterate diesel • Less than 2% of rural households use kerosene for cooking • 55% rural households use for lighting but is an inefficient source of lighting • LPG • 76% subsidy goes to urban areas • 40% of subsidy enjoyed by top 6.75% total population Source: TERI Publication ‘Petroleum pricing in India: Balancing equity and efficiency, November 2005,

  13. Challenges • Need to move away from ad-hoc price revisions • Need to move to full cost pricing at the earliest • Need to adopt targeted subsidy delivery mechanism

  14. Thank You

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