Panel pill to tame fuel subsidy


Government subsidies on fuel could be maintained at a “bearable” level of Rs 20,000 crore per year irrespective of the price of crude in the international markets, if the government implements the Kirit Parikh panel report.

The panel said this could be done through free pricing of petrol and diesel, periodically raising prices of cooking gas cylinders (LPG) and kerosene, reducing the allocation of kerosene and directing ONGC Ltd and Oil India Ltd to part with some of their earnings when crude price goes above a certain level.

“If petrol and diesel are allowed free-market pricing, kerosene and domestic LPG prices are raised periodically… the subsidy burden of the government would come down substantially,” Kirit S. Parikh, chairman of the committee on sustainable pricing of petroleum products, said after submitting its report to petroleum minister Murli Deora.

The committee also suggested that when the crude oil price crossed $60 per barrel, state-owned Oil and Natural Gas Corporation Ltd (ONGC) and Oil India could be asked to part with a proportion of their excess earnings. This is only on crude produced from their nomination blocks.

Parikh said even if the price of crude changed from $70 per barrel to $140 per barrel “the burden on the budget of the government would remain stable at about Rs 20,000 crore, and that I think is a bearable burden for subsidy”.

He said “the government should compensate the gap by providing cash subsidy from the budget. The oil firms marketing PDS kerosene and domestic LPG should be compensated fully for their under-recoveries.”

N.R. Bhanumurthy of the National Institute of Public Finance and Policy said, “The recommendations should be the long-term objectives of the government, but given the political economy situation, it appears unlikely that they would be fully implemented in the medium term.”

In the sharing of revenue, if crude moved beyond $60 per barrel, the report suggested the levy of a special oil tax on ONGC and OIL. Parikh said such a levy should be restricted only on blocks given on a nomination basis.

According to the Parikh report, when crude price rules in the range of $60-70 per barrel, 20 per cent of the excess price over $60 should be the taxable rate.

When crude is in the range of $70-80 per barrel, the rate should be 40 per cent of the excess price over $70.

For crude at $80-90, the recommended levy is 60 per cent above $80. Beyond $90 per barrel, it is 80 per cent above $90.

In its presentation before the committee, ONGC had stated that a crude price hike led to an increase in the cost of inputs such as field service material and equipment. “(Therefore) SOT rate should be calibrated so that ONGC is able to retain some portion of increase in price to cover rise in costs.”

Till last year, upstream firms such as ONGC were asked to bear one-third of the total revenue loss suffered by the state-owned oil marketing companies for selling fuel below cost.

This year, they have been mandated to bear all of the revenue loss for selling petrol and diesel below cost.

ONGC has in the six years since 2003-04 doled out Rs 86,005 crore in fuel subsidies; this year it has already paid over Rs 5,000 crore.

In 2008, the B.K. Chaturvedi committee had recommended that the special oil tax should kick in at $75 per barrel, but its report had been not implemented so far.

The Parikh committee is the third panel constituted by the government on oil pricing. The recommendations of the previous C. Rangarajan and Chaturvedi committees have not been fully implemented.