Parikh panel tests govt,seeks market rates for auto fuels

A PANEL headed by Kirit Parikh has suggested a clean break from the past with market-linked prices for auto fuels and a sharp increase in the prices of kerosene and cooking gas, testing the willingness of the Manmohan Singh government to grapple with a problem that has defied a solution for decades. If the recommendations of the expert group, chaired by the former Planning Commission member, are implemented, it will result in annual savings of over Rs 30,000 crore at current levels of under-recoveries for oil companies. 

    For a government already under severe pressure to cut borrowings and fiscal deficit, the recommendations are just what the doctor ordered. But, it is also under intense attack for failing to keep prices under check, especially of food articles. 
    Already, there are signs that the Parikh report is not a politically popular one. The Congress Working Committee, the party's top policymaking body, will be meeting to discuss food prices on Friday, with chief ministers of Congress-ruled states also present. The leadership of the United Progressive Alliance coalition is unlikely to accept any increase in fuel prices, especially diesel and kerosene, a cabinet minister said requesting anonymity. 
    The argument for keeping diesel prices artificially low has been that any increase in the price of the fuel will be passed on, stoking inflation. But the panel wrote that "this should be compared with the inflationary impact of subsidies, which would be similar." It has also suggested an additional excise duty of Rs 80,000 on diesel-powered vehicles. 
    Oil minister Murli Deora was circumspect, saying that his ministry would discuss the report and send it to the Cabinet in a week. "Any decision will be taken collectively," he observed. Congress spokeswoman Jayanti Natarajan said she was "confident that whatever decision is taken will be in the best interests of the aam aadmi." 
    Although the Prime Minister's Office (PMO) is keen on effecting a moderate hike, at least in the price of petrol, the decision will be taken by the Congress leadership. If the unease in the party is any indication, the political leadership will be wary of endorsing the view of the PMO. 
FUELLING DEBATE 
An additional excise duty of Rs 80,000 should be levied on diesel vehicles 
Increase kerosene price in line with nominal growth in agricultural GDP 
Revise LPG prices in keeping with rising per capita income 
Subsidy on domestic LPG should be discontinued for all others, except the BPL household 
PRICES (in Rs/litre) * Net prices if recommendations are accepted todayParikh panel recommendations may benefit private oil cos most 
    SANJEEV Prasad, executive director at Kotak Institutional equities, was of the view that the recommendations on auto fuel can surely be implemented. "An estimated increase of Rs 4.30 per litre of petrol and a phased increase of about Rs 2 per litre of diesel is feasible. Price hikes recommended for cooking fuel, however, look difficult given the steep increase recommended. The government will have to look at it as a long-term solution and all these recommendations can hold true only crude oil prices remain within $75 a barrel," he said. 
    The panel wants the price of kerosene raised by two-thirds, or Rs 6 a litre, and cooking gas by Rs 100 per cylinder. Oil companies, hit hard because of the existing pricing regime, are pleased. 
    "Very positive report and covers the long-pending issues affecting the country and industry," a representative of Essar Oil said. RS Sharma, CMD of oil explorer ONGC, described the report as "comprehensive". "If implemented, it will help in establishing a transparent subsidy-sharing mechanism for the benefit of all," he said. 
    ONGC paid over Rs 30,000 crore last year to compensate fuel marketers for their under-recoveries because of selling fuel at the government-set price. The CEO of a private oil refining company said there is "no alternative but to de-regulate petrol and diesel prices immediately." 
    Private sector oil companies — Reliance Industries (RIL), Essar Oil and Shell India — could benefit the most if the recommendations are implemented in full. They have been unable to expand their retail operations because only state-run oil firms get compensated for under-recoveries. 
    RIL had to shut its retail operations last year when global crude oil peaked at$147 a barrel. Essar and Shell India also closed some of their pumps, but when crude oil prices softened, they restartedoperations. 
    The other beneficiaries of decontrol will be the state-run upstream companies and the exchequer. In 2008-09, upstream companies paid over Rs 31,000 crore to refiners IOC, BPCL and HPCL, while the government had to foot a subsidy bill of over Rs 72,000 crore. 
    The government's track record, so far, suggests that it has been unwilling to swallow the bitter pill. A 2005 report by a panel headed by C Rangarajan recommended the elimination of subsidy on cooking gas and restricting it to only poor families for kerosene. The suggestion was not implemented. 
    A similar recommendation by a panel chaired by former bureaucrat BK Chaturvedi was also ignored. A senior official in the petroleum ministry said a price hike will not be only an administrative decision, but a political one. "Maximum, petrol could be decontrolled, but not diesel," he said.