The Left Parties have sent the following note today on “Pricing of Petroleum Products” to the Prime Minister, Dr. Manmohan Singh.

Pricing of Petroleum Products


In the background of the note presented by Ministry of Petroleum & Gas on 10th May 2006 to the Left leaders, any price hike is not justified for the following reasons and alternatives available with the Government:


1. In the aforesaid note, the basis of the required price hike in petroleum products has not been spelt out. The increase sought for, is arbitrary as no cost sheet showing crude cost, refining cost and marketing cost has been shown. For example, the cost of crude oil 70 dollar/barrel means roughly Rs. 19 to Rs. 20/litre. The cost sheet does not provide actual refining cost and marketing cost along with break up of taxes & duties and reasonable profit before arriving at the required retail cost. At present tax/duty component of petrol and diesel are 57% and 36 % respectively. This has to be restructured to offset any price hike.


2. The economic implication, shown in the presentation, is notional and not actual. It is reiterated again that “underrecoveries” are notional losses and not actual loss. It is therefore essential that actual financial position in terms of profit/loss of Oil Marketing Companies (OMCs) as well as stand alone refineries as per Profit and Loss Account of 2005-2006 and preceding two years, should be assessed for proper appraisal. “Reasonable profit” for OMCs as well as Private stand alone refineries should be clearly defined after proper assessment.


3. In “Economic implication of current price scenario”, as shown in the aforesaid note the current level of annual government subsidies of PDS kerosene and domestic LPG is about Rs 3000 crore (till 31.3.2007). This is when the crude price is 70 dollar/barrel. Before dismantling of Administrative Pricing System in 2002, the subsidy on PDS kerosene and domestic LPG from the oil pool account for the year 2001-2002 was Rs 11,140 crore when the crude price was below 25 dollars/barrel. While the subsidy from the Govt. has been shifted to OMCs, the revenue earned by the Govt. has gone up from Rs 96,000 crore in 2002-2003 to Rs 1,26,000 crore in 2005-2006 as can be seen by the figures furnished in the status paper. The net gain is therefore Rs 38,000 crore (Rs 8000 crore in subsidy and Rs 30,000 crore in revenue during last three years.) This policy distortion has to be corrected in the interest of the common people and Government should share the burden of subsidies with the OMCs.


4. Government should act on recommendations of the report of the Parliamentary Standing Committee, presented to the Parliament on 22.05.2006. Keeping in view these recommendation, read along with the note from the Left Parties submitted earlier, the possible solutions to insulate the consumer from the price rise are:


¨ Creation of a Price Stabilisation Fund by using the money collected through cess on crude (Rs. 2500/MT) for supporting OMCs. In 2006 – 07 alone cess would amount to Rs. 7500 crore.

¨ Reduction in excise duty of products. The duty should be specific without any advalorem content.

¨ In European Union last year a threat was given to impose ‘windfall tax’ on stand alone refineries earning a refining margin beyond certain level. In India, such a cess or tax beyond a refining margin of 7 to 8 dollars/barrel may be imposed on stand alone refineries.

¨ Duty draw back of Rs. 3500 – 4000 crore given as export incentive to exporter of petroleum product to be reviewed.


5. Instead of either burdening the common people with a price hike or transferring the same to OMCs, Government can recoup the revenue loss, if any, though revenue mobilization from speculative market through security transaction tax, and capital gain tax etc. The recent volatility in share market calls for such an effort. Market manipulators rather than common people should be target for resource mobilization for social schemes.