Petrol costlier by Rs 4, diesel by Rs 2

NEW DELHI: The government has introduced a trade parity pricing strategy for the retail petro sector doing away with the import parity pricing regime that was put in place in April ’02.

Prices of petrol and diesel have been increased by an average Rs 4 and Rs 2 per litre, respectively, in accordance with the new pricing regime.

However, prices of kerosene and LPG were not changed. The new prices will come into effect from Monday midnight. The increase is the highest in Mumbai, where petrol will now sell at Rs 53.5 a litre (a hike of Rs 4.34 per litre), and diesel will sell at Rs 39.96 a litre in Mumbai (an increase of Rs 2.39 a litre). Petrol will sell at Rs 47.51 per litre and diesel at Rs 32.47 per litre in the capital.

The revised prices are still way below the required changes as per the new pricing formula. It is estimated, that while petrol would have to be hiked by Rs 8.75 a litre, diesel would have to be increased by Rs 10 a litre, if they were put on actual trade parity prices.

But given the political pressure and sensitivity of the issue, the government took a calibrated step, albeit after a gap of eight months, to only pass on a modest hike to the consumer price. The new trade parity pricing regime is in line with the Rangarajan Committee report, which had recommended lowering of protection levels for refiners and a more transparent system to provide subsidies.

Accordingly, the Union cabinet on Monday decided to reduce customs duties on petrol and diesel to 7.5% from 10%, thereby reducing the effective protection level for refineries.

It may be noted that this will not have any impact on revenue collections as India is now self sufficient in petrol and diesel. Slashing of duties will only reduce the cushion that the refinery companies enjoyed. On its part the government has also taken a part of the huge losses incurred by the oil companies for keeping retail prices unchanged despite the spike in crude oil prices.

Prices were last raised in September ’05 when crude prices were $59 a barrel as against an average of $71 a barrel now. The government has decided to issue oil bonds of Rs 28,300 crore to the oilcos. These bonds, which are expected to be issued in equal quarterly instalments of Rs 7,000 crore will bear interest and are likely to be issued on SLR basis.

The total package (government bonds, price hike, reduced customs duty and trade parity) is expected to meet the deficit in the oil economy. The total under-recoveries of the oilcos is expected to be a whopping Rs 73,500 crore by the end of this fiscal if crude oil continues at $70 a barrel.

The trade parity coupled with customs duty change will bring down losses by Rs 6,500 crore, and the price hike will reduce it by Rs 9,300 crore. Add to the bonds of Rs 23,000 crore by the government and an expected contribution of Rs 24,000 crore by the upstream oilcos like ONGC.