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Press Release [FREE Access]
Petro Intelligence » The Great Indian Rip-off

By R. Sasankan

This must count as the biggest double whammy for consumers of transportation fuels in India: petrol and diesel. A combination of persistently high taxes on fuel and an anachronistic element in the overall pricing mechanism – import parity price for domestic consumption of the two fuels that ironically is now being exported by refineries – translates into a gigantic rip-off for consumers at India’s retail pumps that fatten profits of oil marketing companies.

The petroleum sector in India ranks among the highest taxed sectors in the country. As a result, the Indian consumer pays one of the highest retail prices for transportation fuels such as petrol and diesel among the south Asian countries.

Soon after the National Democratic Alliance (NDA) led by Narendra Modi assumed power in 2014, prices of crude oil crashed in the international market. No other prime minister in recent history had such a stroke of luck. India imports over 83 per cent of its crude oil requirements but the Indian consumer did not benefit from the crash in crude oil prices.

That is because the government chose to soak up most of the price benefit through excise duty to finance the development of public infrastructure. The logic behind the government’s noble intentions cannot be questioned. Truth be told, there were no great public agitations either pressing for a reduction in fuel prices. The result: the refineries started raking in the moolah.

However, petroleum pundits believe that the government should have cut some slack to the Indian consumer by scrapping the age-old import parity pricing mechanism that had become both irrelevant and a device to inflict greater misery on the hapless consumer of transportation fuels.

India has innumerable refineries with a total refining capacity of 252 million tonnes per annum. As a result, it is also the largest petroleum products exporter in Asia. The government has already flagged its ambition to turn the country into an export hub for petroleum products by creating fresh refining capacity.

This raises a troubling question: how can a petroleum product exporting country charge an Import Parity Price (IPP) for its domestic consumers? IPP represents the price that importers would pay in case of actual import of product at the respective Indian ports which include elements like the FOB price, ocean freight, insurance, customs duty, and port dues. Since there is very little import of these fuels into the country, this is a completely notional tax that is being tacked on to price at the retail pump.

The import parity pricing was introduced in 2001 after the Administrative Pricing Mechanism (APM) was dismantled. The end of the APM regime meant that oil marketing companies were technically granted the “freedom” to fix their retail prices. At that time, crude oil prices were hovering around $ 20 per barrel and the refining margins ranged between $1.50 and $ 2 per barrel. India was then a net importer of petroleum products and, therefore, an Import parity pricing was justifiable.

The situation changed dramatically more than a decade ago when private refinery Reliance Industries Ltd (RIL) started exporting petroleum products. RIL was followed by the Essar refinery. The refining margins these days are in the range of $ 8 to 10 per barrel. In FY 2017-18, against a domestic consumption of 206 million tonnes, domestic production stood at 254 million tonnes, a net surplus of 48 million tonnes. This surplus is expected to go up as the government sets about raising refining capacities.

The basic question here is: When the country is exporting petroleum products to competitive markets, is it fair to charge the domestic customers an import parity price for phantom imports of these fuels?

A look at the price build- up of retail selling price of petrol and diesel brings out an interesting aspect. The Refinery Transfer Price (RTP) for Motor Spirit (petrol) is Rs 33.78 per litre. But after taxes and dealers’ commission, the consumer pays Rs. 72.19 per litre. Considering that 54 per cent of the price of petrol is taxes and dealers’commission, the consumer price will come down by about Rs. 4 per litre if the import parity price regime is scrapped. This works out to a very substantial benefit for the consumer. In the case of diesel, the RTP is Rs. 35.64 per litre but the consumer must fork out Rs 62.73 per litre. Since taxes account for 43 per cent of the price of diesel, the ultimate consumers will stand to gain by about Rs 3.30 per litre for diesel if the IPP regime is dumped.

The government is trying to protect the profits of state-owned refineries by retaining the IPP regime. RIL has the highest gross refining margin (GRM) among all refineries even as it exports most of its products. Some of its domestic retail outlets offer discounts in the range of Re 1-1.5 per litre. If petroleum-exporting India introduces Export parity Pricing (EPP) for its petroleum products, its consumers will benefit substantially. EPP is the quoted export price plus the advance licensing benefits. Since the customs duty on crude oil is zero, advance licensing benefits is also zero. So EPP is just the quoted price, the first element of IPP. But is the government listening?



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