The biggest component of India's import is crude oil; around 80% of our crude is imported. The high international crude price, around $110 per barrel, coupled with a weaker rupee, is amplifying India's current account deficit.
India spent a staggering $169.25 billion to import crude oil in 2012-13 and has already spent $47.13 billion on oil imports in first four months of this fiscal year.
Unfortunately, India's pricing mechanism of fuels is also faulty. India is a net importer of crude oil but a net exporter of petroleum products, thanks to excess refining capacity. The price of fuels in India is governed by trade parity pricing (TPP), comprising of 80% import-parity price (IPP) and 20% export-parity price (XPP) at the refinery gate.
So, though the products are produced in India, they are priced as if we are importing these products by benchmarking them with the price of the products prevailing in the Arabian Gulf. On top of that, some imaginary costs like trade premium and ocean freight charges are also levied in dollar terms.
IPP price is then achieved converting it to Indian currency. The non-existent price build-up does not stop here. Charges like customs duty and import charges are further added to the IPP price. In India, the retail price of petroleum products, other than petrol and aviation turbine fuel (ATF), is administered and is much lower than TPP.
The gap between the TPP of a petroproduct like diesel at the refinery gate and its administered price is termed as under-recoveries or losses. Government compensates three state-run oil marketing companies (OMCs) for their losses. Is under-recovery really a loss?
A closer look at the price build-up of diesel in Delhi — as reported on Indian Oil Corporation's website — reveals that the so-called underrecoveries of OMCs are notional and exaggerated due to the inclusion of non-existent costs like trade premium, ocean freight charges, customs duty and import charges in calculating TPP.
Adepreciating rupee further aggravates the loss figures because of unnecessary benchmarking of petroproduct price with foreign currencies. Current under-recovery on diesel reaches Rs 12.12 per litre from Rs 10.22 per litre on August 16, 2013.
The scheme of under-recovery also acts as a barrier to private players from entering the market because, unlike the state-owned OMCs, the government won't bear the compensation burden for them. Private players should be eligible for the same subsidies as public companies. This will encourage competition and break down the apparent cartelisation among OMCs.
The finance minister has said that the government would leave no stone unturned to contain the current account deficit at about $70 billion, or 3.8% of GDP, from a record high of 4.8% last year.
The government has imposed several restrictions on foreign exchange outflows and gold imports to arrest rupee depreciation but ignored a low hanging fruit: the rectification of faulty pricing mechanism of petroleum products. Because India is a net exporter of petroleum products, the appropriate cost price for the oil retailer at the refinery gate should be XPP, the price that oil companies would realise on export of a petroleum product.
By construct, XPP is lower than the TPP and, as on August 16, 2013, the divergence was Rs 1.86 per litre for diesel, which must have broadened by further depreciation. Redefining under-recovery with respect to XPP will isolate the price of regulated petroleum products from the exchange rate.
It will significantly reduce the country's subsidy burden and, according to a rough estimate by the finance ministry, a shift to XPP would have cut the subsidy on diesel by Rs 14,372 crore in 2012-13. Additionally, Rs 2,245 crore and Rs 1,001 crore would have been saved on LPG and kerosene respectively.
Private participation should further reduce XPP and, hence, under-recovery figures, as private players are better than their state-run counterparts in refining in terms of superior technologies, hedging strategies, high-sea deals in crude procurement and strategic coastal locations.
Source:- economictimes.indiatimes.com
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