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DEREGULATION Decontrolling or deregulating the petrol prices mean that, the government will no longer be subsidizing petrol prices and the prices will be purely linked to international crude prices. In the case of diesel prices, though it will be only partially regulated- the reason being an attempt to avoid sudden spike in inflation.
Introduction • Government of India deregulated the prices of petroleum products • Decision was taken on 25th June 2010 at EGOM (Empowered Group of Ministers) • Decision was made on the basis of recommendation by Kirit Parikh Committee
Kirit Parikh Committee Recommendation * the figures are based on prevailing prices in 2009-10
The Big Rider • This is not the first attempt by the government to deregulate petroleum product prices. • In April 2002, in an attempt to phase out subsidy on petroleum products, the government dismantled the administered pricing mechanism (APM) for pricing of Petrol and diesel • To revise retail prices within a band of +/-10% of the mean of rolling average of the last 12 months
Economy before DEREGULATION
APM and the oil pool account abolished in 2002 • Government starts providing subsidies in the annual budget for petroleum products • OMCs took control of adjusting prices • Deficit’s started to grow from 2004 • By 2006 the deficit was Rs. 400billion for petrol and diesel
Between 2002 and 2005 the prices of petrol increased 64% in India • International prices increased over 140% • The government issued government bonds to OMC’s in order to reduce under – recoveries in 2005-06
Reasons • To reduce the losses of oil marketing companies which are borne by: • Upstream oil sector companies like ONGC, OIL INDIA • Government: By issuing oil bonds • The residual amount is borne by OMC like HPCL, BPCL, etc. • To increasecompetition, since private companies do not receive financial support
The Ugly Truth • Crude oil : $115/barrel • Translates to Rs 33.20/ litre • Final Petrol Price : Rs. 41.25/ litre • The price we pay : Rs 63.77 * percentages are with respect to selling price.
Why high prices? • Very high central taxes • State government charge even higher taxes • 75% of petroleum products are imported • Inelastic demand for Oil
Impact of Deregulation • Increase in Prices • Inflation • Interest rate • Public Finance • Private players will re-emerge • Improve Valuation of OMC
Inflation • Impact Of Price Deregulation On WPI Index
Inflation Although direct impact on WPI by deregulation is 124.53 bps but increase in fuel price will also increase price of other commodities which will result in increase in inflation by another 90 to 150 bps.
Public Finance • Under-recoveries will reduce from Rs.770 billion to Rs. 530 billion • As Petrol is fully deregulated so under-recoveries on petrol, ~10% will be fully wiped out.
Under-Recovery OMCs are currently incurring daily under-recovery of Rs.228 crore on the sale of Diesel, PDS Kerosene and Domestic LPG.
Fiscal Deficit • Government in reducing Fiscal Deficit which is roaring around 11% (including off-balance sheet items like Oil Bonds, Subsidies, etc)
Interest Rates • The deregulation has impacted the rise in overall fuel prices, which will increase the prices of products & food due to increase in transportation cost. As we have shown above the overall impact on WPI by 124.53 bps thus, higher inflation resulted in tightening of Monetary Policy.
Sudden Effect on the Share Market • Exploration stocks, ONGC and Oil India rose by between 3.36% to 5.01%,
Improve Valuation of OMC • Due to increase in fuel price the profit of Oil marketing companies will improve which will result in higher Earning per share.
CONCLUSION • The overall de-regularising effect will be helpful to Government • Reduction in subsidies • However, absence of: • The timeline of the diesel price deregulation, • The frequency of change in petrol price, and • Pricing limit (band) for petrol price takes some sheen off the decision.
