Indian government plans change to fuel pricing plan to reduce deficit

The Indian Ministry of Finance has decided to shift from a fuel trade parity pricing policy (TPP) to one based on export parity (EPP) with the intention of reducing the country’s fiscal deficit. There is a fear that since public oil companies are already struggling, this move could negatively affect their profitability, since a change to export parity will bring down the selling prices of both petrol and diesel. Gross refining margins are also expected to take a severe hit if subsidy is calculated by export parity pricing.
Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL) and Indian Oil (IOC) have suffered losses between 8.5% and 10.2% of market value. TPP was introduced in 2006 and is based on a combination of import parity price (80%) and export parity price (20%).
The costs for EPP are lower as it takes the benchmark free-on-board prices whereas TPP considers crude import duties, freight costs, insurance and various duties. This means TPP is a more costly calculation method when compared to EPP.
EPP is based on international prices (the Persian Gulf price minus freight) and results in lower under-recoveries. A 2.5% customs duty accompanies the import parity price for diesel and petrol.
The Indian government expects this new pricing policy will reduce the deficit by about INR15,000-18,000 crore (USD2.3–2.8 billion) by paying out less to the oil firms, which are sure to incur losses.
Though reducing the subsidy bill is the government’s aim, the new policy has met with considerable opposition from the oil marketing companies due to the loss of subsidies.
The oil ministry estimates it will lose the same amount as the government gains if EPP is implemented. Even financing provided by banks for the expansion of oil marketing companies will be affected by this switch to EPP.
The three public sector undertaking oil marketing companies — IOC, BPCL, and HPCL — produce 110 million metric tons a year. “It is not only about [gross refining margins], it is about humongous losses that we will make. It will make all refinery projects unviable for HPCL,” said Bhaswar Mukherjee, HPCL director of finance. Upstream firms like GAIL and ONGC will see reductions in subsidy costs.
The Parikh panel was convened to submit a report by July 2013 in hopes of finding a compromise that will appeal to both the oil and finance ministries.
(July 9, 2013)