Panel recommends hike in prices of diesel, LPG and kerosene

An expert group appointed by the government has recommended an immediate across-the-board increase in the administered prices of diesel, LPG and kerosene, ahead of freeing the market from all controls.

The expert group has recommended a Rs5 per litre hike in diesel price, Rs4 per litre increase in kerosene price and a Rs250 per cylinder increase in the price of subsidised LPG and limiting the quota of subsidised LPG cylinders to households at 6, against 9 cylinders at present.

The expert group headed by former member of the Planning Commission Kirit S Parekh recommended that diesel price be raised by Rs5 per litre with immediate effect and the balance under-recoveries be made up through a subsidy of Rs6 per litre to PSU oil marketing companies.

The subsidy on diesel should be immediately capped at Rs6 per litre, the panel suggested in its report submitted to petroleum minister M Veerappa Moily today.

The expert group wanted the fixed subsidy of Rs6 per litre of diesel be reduced gradually and finally removed through regular monthly downward revisions in the cap on subsidy and corresponding increase in the price of diesel over the next one year.

This would imply freeing of price of diesel beyond this cap. Any rise in the gap between domestic and international prices beyond Rs6 per litre should be made up by corresponding increase in the price of diesel in the domestic market by the OMCs.

If the gap falls below Rs6 per litre, either the prices should be reduced or the subsidy to be provided should be reduced.

Alternatively, the group suggested that in future, oil companies should be permitted to revise the prices above the subsidy cap in line with the changes in the international prices and other costs elements on their own.

The expert group appointed by the government to look into alternative mechanisms for pricing diesel, domestic cooking gas (LPG) and PDS kerosene has recommended freeing the market from price controls at the earliest, as the best course of action.

It noted that there is no other single or unique formula for pricing of diesel, LPG or kerosene, which would not be distortionary, without attendant ill-effects for the economy, and can be said to be the correct method for the country.

In view of the significant gap between the present administered prices and the international prices, the committee has suggested that the government continue with the policy of phased relaxation in administered prices of diesel.

''Since the government has already decided to eventually free diesel price, there is no need to tinker with the existing pricing formula, which, even if modified, will not solve the problem of mounting under-recoveries incurred on sales of controlled products, mainly due to high international crude prices and depreciation of Indian rupee'', the panel suggested. 

PDS kerosene: The expert group has recommended that PDS kerosene should be priced at full market price and the benefit of the subsidy be given to the deserving consumers, like BPL families, through direct cash transfer mechanism. For this, it has suggested fast-tracking of scheme for direct transfer of subsidy to BPL families throughout the country to be completed within the next two years.

In the interim, the expert group recommended that the price of PDS kerosene be increased by Rs4 per litre immediately and thereafter the price of PDS kerosene be revised from time to time at least in line with growth in the per capita agriculture GDP.

Allocation of PDS kerosene should be reduced with spread of rural electrification and increased use of LPG and PNG for cooking, the group said.

Since kerosene is neither exported nor imported and also since there is no custom duty on PDS kerosene, its pricing may continue to be based on IPP.

Domestic LPG: The panel has recommended that the limit for subsidised cylinders be reduced from the present 9 to 6 cylinders per annum to each household and the DBTL scheme be restricted to identified families based on an exclusion criteria.

It also recommended that the direct transfer of subsidy scheme be implemented throughout the country within the next one year.

The group suggested that the price of subsidised domestic LPG be raised by Rs250 per cylinder immediately and the balance subsidy be phased out over the next 2 years through gradual price increases.

Piped natural gas to homes be actively promoted in urban areas.

As the country continues to be heavily dependent on imports of LPG, the panel suggested that the methodology of fixing refinery gate price of domestic LPG should continue on IPP basis.

Taking into account the existing contribution worked out under NELP regime and slab based discounts, the expert group also recommended subsidy contribution formula for ONGC & OIL from the financial year 2014-15 onwards:

• For crude price of less than $80 per barrel – 40 per cent of crude price;
• For crude price$80 to $120 per barrel – 40 per cent + 0.25 per cent of incremental price;
• For crude price beyond $120 per barrel – 50 per cent of crude price.

In view of the current high level of under-recoveries, the panel suggested that contribution from ONGC and OIL during the financial year 2013-14 may be retained at the existing level of $56 per barrel of crude oil produced.

As regards GAIL, with the reduction in availability of gas through administered price mechanism, the panel has recommended that its contribution should not exceed the gross profit made on sale of LPG (after allowing a reasonable profit amount to be retained by GAIL).

After adjusting the upstream contribution, the balance amount of under-recovery on diesel, PDS kerosene and subsidised domestic LPG should be fully compensated to OMCs by providing cash subsidy from the government budget until the prices are fully deregulated and subsidy on these products is eliminated, the panel recommended.

The expert group recommended that OMCs be given the freedom to procure crude oil and petroleum products through a mix of long term contracts and spot purchases from all available sources.

This can be accomplished without compromising transparency and accountability by working out mechanisms in consultation with the CVC, it added.