CHAPTER-VI PRICES OF PETROLEUM AND CONSUMPTION.. This chapter gives detailed account of pricing mechanism for crude and petroleum products and its relationship with consumption. From the analysis of previous chapters, it has been revealed that the consumption of crude oil and its products have grown rapidly, recording average annual trend growth rate of 5.8 per cent and 5.4 per cent in the four decades respectively. Although, growth in the domestic production of petroleum products attained 5.8 per cent growth, domestic production of crude had been insignificant and resulted in huge imports. The gross imports of crude oil registered average annual trend growth rate of 10.6 per cent. As substantial quantity of petroleum crude has been imported, it is quite natural that domestic prices of petroleum products are strongly influenced by international crude oil prices. Crude oil pricing in India has always been treated somewhat differently from that of petroleum products. By and large, it is basically the crude oil which forms the bulk of imported energy. Secondly, while there is some surplus in refining capacity, domestic production of crude oil is limited. Thirdly, petroleum products enjoy differential pricing which is not the case with crude oil. Therefore, for all these reasons, it is logical to analyze the pricing systems of crude and petroleum products separately. 235
6.1 Pricing of Crude Pricing mechanism of petroleum in India has changed from cost plus formula in the period 1975 to 2002 to import and trade parity principle in the period 2002-2010 Therefore, it is essential to examine the price in relation with consumption in the two different pricing, i.e., Administered Pricing Mechanism (APM), and Market Determined Pricing Mechanism (MDPM). Under Administered Pricing Mechanism (APM), pricing of domestic crude was determined as the weighted average of cost of production of Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) plus 15 per cent post-tax return on capital employed to compensate for the operating expenses. Price of domestic and imported crude under APM is given in Table 6.1.1. 236
Table 6.1.1 Prices of Imported and Domestic Crude Oil in India from 1975 to 1997 (` /mt) Year Price of Imported Crude* Base Price Royalty Onshore Cess Price (including of Royalty and Cess) Base Price Royalty Offshore** Cess Price (including of Royalty and Cess) Effective of Domestic Price Price Imported Crude/ Price of Domestic Crude 1974-75 656 270.04 270.04 01-04-1975 2.38 1975-76 772 245.42-60.00 305.42 2.70 1980-81 2061 203.42 61.00 60.00 324.41 331.65 61.00 60.00 452.65 01-04-1981 0.0045 1985-86 2435 1021.00 192.00 300.00 1513.00 1021.00 192.00 300.00 1513.00 2.38 1990-91 2956 1021.00 481.00 900.00 2402.00 1021.00 481.00 900.00 2402.00 01-04-1990 1.23 1991-92 3654 1021.00 481.00 900.00 2402.00 1021.00 481.00 900.00 2402.00 1.52 1992-93 3468 1506.00 481.00 900.00 2887.00 1506.00 481.00 900.00 2887.00 16-09-1992 1.20 1993-94 NA 1796.00 539.80 900.00 3235.80 1796.00 539.80 900.00 3235.80 01-04-193-1994-95 NA 1796.00 539.80 900.00 3235.80 1796.00 539.80 900.00 3235.80-1995-96 NA 1796.00 539.80 900.00 3235.80 1796.00 539.80 900.00 3235.80-1996-97 NA 2094.00 578.00 900.00 3572.00 2094.00 578.00 900.00 3572.00 01-04-1996 - Source : MoPNG *Unit value for gross crude oil imports; **: Production began from 1976; NA: Not available 237
From the above table, it has been observed that domestic price of crude oil was less than the price of imported crude during 1975-1997. For many years, domestic price of crude was remained same and changed according to the policy of the Government, for instance, base price which was reduced in 1975-76 to ` 245.42 from ` 270.04 in the previous years, remained constant till 1981. Later 1992-93 price was revised to ` 1506 from ` 1021 in 1991-92, according to the recommendation of Cabinet Committee. From 1.4.98, the crude oil producers had been paid a pre announced increase in percentage of the international Free on Board (FoB) prices on a year-to-year basis subject to a floor price of ` 1,991/mt and a ceiling of ` 5,570/mt and it is ` 6,470/mt for March 2002. The pre announced increased in percentage are 75 per cent for 1998-99, 77.5 per cent for 1999-2000, 80 per cent for 2000-01 and 82.5 per cent for 2001-02. Thus, under APM, price of crude oil was determined by the government. It has been inferred that movement of crude oil prices were fairly independent of the behaviour of international prices. The ratio of imported to domestic crude oil price was 2.39, which has gradually come down to 1.2 in 1992. The proportion of cess formed around 8 per cent to 40 per cent in the total price of crude, highest in the year 1989. Since 1990, it has declined and now cess has been abolished for the fields discovered under the New Exploration Licensing Policy (NELP) in order to encourage exploration and production activities in India. 1 1 Pricing of Petroleum Products- Sixth Report (2005), Ministry of Petroleum and Natural Gas. pp. 13-20. 238
6.2 Pricing of Petroleum Products Prices of sensitive fuels - petrol, HSDO, LPG and kerosene deserve more attention because of their lion share in total consumption. In 2009-10, while the LPG and kerosene have a share of 72 per cent in total light distillates, consumption of HSDO and kerosene has a share of 93 per cent in total middle distillates in this year. Wholesale price index for the petroleum products has been taken as proxy for the prices and its changes has been analysed in comparison with changes in consumption. 6.2.1 Prices of Petrol and Diesel under APM and its Consumption Petrol and diesel has been the transport fuels which formed 46 per cent in total consumption. The following table gives the details on wholesale price index of petrol and diesel and its consumption during 1981-82 to 1996-97. Year Table 6.2.1.1 Wholesale Price Index of Petrol and Diesel and its Consumption Wholesale Price Index of Petrol in India from 1981 to 1997* Consumption of Petrol (mt) Wholesale Price Index of HSDO Consumption of HSDO (mt) 1981-82 36.2 1.60 46.2 10.83 1985-86 43.7 2.28 54.1 14.89 1989-90 52.9 3.49 55.5 20.71 1990-91 67.9 3.55 71.7 21.14 1995-96 106.5 4.68 108.8 32.26 1996-97 131.1 4.96 120.9 35.02 Source : Energy - Statistics - 2011, CSO, MoPNG * Data on wholesale price index available only from 1981-82. 239
During the APM period, the per cent change # in wholesale price index of petrol was positive, about 262 and its consumption increased to about 210 per cent. On the other hand, wholesale price index of HSDO has increased with relatively less percentage of 162 for the percentage increase in consumption of 223 for the same period. The price was often kept artificially low compared to market rates through subsidies. Being administered, the wholesale price index remained unchanged during the periods 1983-1985, 1988-1990 and 1994-96. 6.2.2 Prices of LPG and Kerosene under APM and its Consumption in India Both LPG and kerosene have been the important fuels for the household sector in India. Details on price and consumption for these cooking fuels are given below. Table 6.2.2.1 Wholesale Price Index of LPG and Kerosene and its Consumption in India from 1981 to 1997* Year Wholesale Price Index of LPG Consumption of LPG (mt) Whole Sale Price Index of Kerosene Consumption of Kerosene (mt) 1981-82 46.8 0.49 68.2 4.69 1985-86 55.8 1.24 83.0 6.23 1989-90 61.8 2.27 88.5 8.24 1990-91 61.8 2.42 98.4 8.42 1995-96 109.5 3.92 100.0 9.93 1996-97 131.4 4.27 100.8 10.15 Source : Energy - Statistics - 2011, CSO, MoPNG * Data on wholesale price index available only from 1981-82. # New Value Old Value Per cent Change = 100 Old Value 240
Chart 6.1 Wholesale Price Index of Fuels under APM from 1981 to 1997 140 Petrol HSDO 120 LPG Kerosene 100 80 Index 60 40 20 0 1981-82 1985-86 1989-90 1990-91 1995-96 1996-97 241
The wholesale price index of LPG showed percentage increase of 181, for which consumption registered a increase of about 767 per cent. Trend is similar to kerosene, while the consumption shows an increase in percentage of about 116 per cent, wholesale price index recorded an increase of 48 per cent. Because of the importance of cooking fuels for lower income people, prices was not allowed to rise, was kept low for many years.in particular, wholesale price index of kerosene did not get affected by either increase or decrease in the international prices. When there was drastic fall in the international price of crude oil in mid 1985-86, whole sale price did not experience any fall. Also, it remained the same when there was an increase in the international price during 1990. The subsidies for the LPG and kerosene formed a big share (86%) in 1993-94, 78 per cent in the next year and 62 per cent in 1995-96 of the total subsidies of petroleum products. The individual shares of subsidies for LPG and kerosene were 19 per cent and 21 per cent respectively in 1993-94. The share of LPG further increased to 57 per cent and the share of kerosene to 45 per cent in 1995-96. Although APM shielded the companies in the various stages of oil industry and achieved socio-economic objective of the Government to a large extent, it resulted in the following. 1. Adequate financial resources could not be generated for investment in the upstream and downstream sectors. 2. The ability of the oil companies to generate investible surpluses was reduced considerably by the allowed returns on the depreciated net fixed assets. 242
3. Pricing of subsidised petroleum refined products much below their economic value led to inefficient, wasteful use of those products resulting in sub-optimal inter-fuel substitution. 4. Inflexibility in the APM mechanism has led to deficit in the pool accounts. Deficit was more than ` 50 billion in March 1996 and as on March 2000 it geared up to ` 63 billion. Subsequently in 1997-98, APM was dismantled and Market Determined Pricing Mechanism (MDPM) came into existence. Under this decontrolled regime, the prices of indigenous crude oil are determined on the basis of the Crude Oil Sales Agreement (COSA) between the producers and the refineries by benchmarking various indigenous crude oils to equivalent international crude oils. Hence, crude oil pricing for both ONGC and OIL has been different. The retail prices of petroleum products were linked to the import parity pricing. However, five commodities viz. petrol, diesel, domestic LPG, PDS kerosene and aviation fuel continued to be controlled commodities. The price of ATF was later decontrolled on 1.4.2001. But until 31st March, 2002, there was Administered Pricing Mechanism for the other four commodities. The period from 1998 to 2002 was the period of transition. The subsidy on SKO (PDS) and LPG (domestic), which under APM was crosssubsidised through MS and ATF prices, was to be met out of the Government s fiscal budget. Accordingly, the Government announced the PDS kerosene and domestic LPG subsidy scheme, 2002 in January 2003. The subsidy was to continue 243
for 3-5 years beginning 2002-03. 2 After providing for the aforesaid subsidy, the retail prices would then vary as per changes in the international oil prices. 6.2.3 Prices of Petrol, Diesel, LPG and Kerosene under Decontrolled Prices To find out whether the charges in domestic prices of Petrol, Diesel, LPG and Kerosene has changed in line with the market or not, analysis has been carried out on domestic prices with Indian Basket of crude and international price. Table 6.2.3.1 Price of Petrol under Decontrolled Prices and its Consumption from 2002 to 2010 Year Wholesale Price Index Increase In International Price ($) Increase In Indian Basket Crude ($) Increase In Consumption (mt) Increase In 2002-03 163.4 30.15 26.67 7.57 2003-04 178.7 9.36 35.03 16.19 27.96 4.84 7.90 4.32 2004-05 203.5 13.88 48.08 37.25 37.61 34.51 8.25 4.48 2005-06 231.1 13.56 64.51 34.17 55.72 48.15 8.60 4.23 2006-07 254.8 10.26 72.62 12.57 62.46 12.10 9.29 8.02 2007-08 242.3-4.91 90.76 24.98 79.25 26.88 10.33 11.19 2008-09 260.8 7.64 89.42-1.48 83.57 5.45 11.26 9.00 2009-10 242.7-6.94 76.23-14.75 69.76 16.52 12.82 13.85 Source : MoPNG 2 Bandyopadhyay, Kaushik Ranjan, (2009), "Petroleum Pricing in India: Transition from APM to MDPM," MPRA Paper 25905, University Library of Munich, Germany, p. 24. 244
The international price of petrol has an increasing trend, it increased abnormally from 2004-05, more than doubled in 2005-06, rose continuously and reached a high of $ 90.76 in 2007-08, then declined. Similar trend has been observed in Indian basket of crude oil. The wholesale price index of petrol also increased in the years 2004-05 and 2005-06, but increase in wholesale index was less than the increase in international price of petrol and Indian basket of crude oil. However in 2007-08, when international price of petrol increased to $ 90.76 from $ 72.62 in 2006-07, the wholesale price index of petrol fell down to 254 from 242 because of cut in the price of petrol of ` 2 to ease the inflation in the country. 3 When it was decreased marginally in the next year, wholesale index price increased sharply from 242.3 to 260.8. However, both international price and wholesale price index went down in 2009-10. The overall increase in international price of petrol has been 153 per cent and 162 per cent for Indian basket of crude for the period 2002-10. The corresponding value of increase in wholesale price index for petrol is 48 per cent for the consumption which saw an increase of about 69 per cent in the new regime. The whole sale index of petrol did not reflect the changes in both Indian basket of crude oil and international price. For instance in 2007-08, Indian basket of crude oil showed an increase of 27 per cent and international price of petrol had an increase of 25 per cent, but wholesale price index decreased by 5 per cent. When international price of petrol decreased about 1.5 per cent in 2008-09, both Indian 3 Petrol Price Cut by ` 2 litre and Diesel by Re. 1, Feb 15, 2007, http://news.outlookindia. com 245
basket of crude oil and wholesale price index registered a positive increase of 6 and 8 per cent respectively. Table 6.2.3.2 Retail Prices of Petrol under Decontrolled Prices (2002-2010) (` / litre) Prices as on Mumbai Calcutta Delhi Chennai 01-04-2002 30.78 26.99 26.54 28.49 01-04-2003 38.59 25.37 35 29.68 33.49 26.19 36.56 28.33 01-04-2004 38.83 0.62 36.61 4.60 33.71 0.66 36.79 0.63 01-04-2005 43.23 11.33 40.89 11.69 37.99 12.70 41.25 12.12 01-04-2006 49.16 13.72 46.9 14.70 43.49 14.48 47.49 15.13 01-04-2007 48.41-1.53 46.9 0.00 42.85-1.47 47.48-0.02 01-04-2008 50.51 4.34 48.95 4.37 45.52 6.23 49.61 4.49 01-04-2009 44.55-11.80 44.05-10.01 40.62-10.76 44.24-10.82 0-04-2010 52.2 17.17 51.67 17.30 47.993 18.15 52.13 17.83 Source : MoPNG Retail prices of petrol in metropolitan cities of Mumbai, Calcutta, Delhi and Chennai shows that overall percentage increase in retail prices has doubled in Calcutta (91%) as compared to wholesale price index. Mumbai recorded a percentage increase of 70 per cent and Chennai and Delhi almost equal percentages of 83 per cent and 80 per cent respectively. When wholesale price index decrease by 5 per cent in 2007-08, Mumbai and Delhi recorded a decrease of 1.5 per cent, but 246
retail price in Chennai was hardly decreased and no such change was found in Calcutta. 4 Difference in the wholesale price index and retail price of petrol was due to the taxes and duties by Central and State Governments. As on September 2008, the incidence of taxation as a percentage of retail prices at Delhi was 45 per cent for petrol. The share of excise duty accounted for 27 per cent in the price of petrol and the sales tax was 17 per cent. Custom duty had a share of one per cent in total taxes. Table 6.2.3.3 Prices of Diesel under Decontrolled Prices and its Consumption from 2002 to 2010 Year Wholesale Price Index International Price ($) Consumption (mt) 2002-03 273.5 28.93 36.64 2003-04 300.4 9.84 30.48 5.36 37.07 1.18 2004-05 360.4 19.97 45.28 48.56 39.65 6.95 2005-06 430.4 19.42 64.7 42.89 40.19 1.36 2006-07 468.2 8.78 74.12 14.56 42.90 6.74 2007-08 451.6-3.55 92.91 25.35 47.67 11.12 2008-09 488.0 8.06 101.75 9.51 51.67 8.39 2009-10 478.1-2.03 74.67-26.61 56.32 9.00 Source : MoPNG 4 Petroleum Planning Cell, www.ppac.org.in 247
During 2002-10, the overall increase in wholesale price index of diesel was much higher than petrol (75%) for an increase in consumption to about 54 per cent. The percentage increase in international price of diesel was 158, which is marginally higher than price of petrol. The wholesale price index of diesel has not rejected the changes in the price at international market. When international price of diesel showed an increase of 49 per cent in 2004-05 because of surge in price of oil, the wholesale price index has increased of about 20 per cent. Similarly in 2007-08, internal price of diesel increased of about 25 per cent but wholesale price index of diesel experienced a decrease of 4 per cent due to cut of ` 1 in the price of diesel to tame the inflation in the country. Retail prices of diesel at different cities are given in the Table 6.2.3.4. Table 6.2.3.4 Retail Prices of Diesel under Decontrolled Prices from 2002-2010 (` / litre) Prices as on Mumbai Calcutta Delhi 01-04-2002 21.10 16.97 16.6 18.1 Madras 01-04-2003 27.88 32.13 23.51 38.54 22.11 33.19 24.65 36.19 01-04-2004 27.43-1.61 23.99 2.04 21.73-1.72 24.23-1.70 01-04-2005 32.83 19.69 28.72 19.72 28.22 29.87 29.3 20.92 01-04-2006 37.57 14.44 32.87 14.45 30.45 7.90 33.72 15.09 01-04-2007 34.96-6.95 32.88 0.03 30.25-0.66 33.31-1.22 01-04-2008 36.08 3.20 33.92 3.16 31.76 4.99 34.4 3.27 01-04-2009 34.45-4.52 32.92-2.95 30.86-2.83 32.82-4.59 01-04-2010 39.88 15.76 37.99 15.40 38.01 23.17 38.05 15.94 Source : MoPNG 248
During 2002-10, retail prices for diesel in Mumbai increased by 89 per cent, Calcutta by 124 per cent, Delhi 129 per cent and 110 per cent in Chennai. Relative share of taxes in retail price of diesel formed 25 per cent in 2008, which was less than the relative share of taxes in petrol. In the total burden, share of sales tax (12%) was more than the share of excise duty (10%) and the custom duty (3%) was less. Retail prices rose in line with wholesale price index, except a marginal fall in the years 2004, 2007 and 2009 but there was sharp increase in 2010. From this analysis, it is evident that prices of these two fuels did not move in tandem with the international prices. Retail prices of petrol and diesel have not reflected the changes in international price. Prices were controlled as they were widely used in public transport, food freight and an input into agricultural production. Prices adjustment in the Retail Prices of Petrol and Diesel Initially from 1-4-2002 till about end of December, 2003, the oil companies used to set the prices of petrol and diesel every fortnight and they were doing so because of the stability in the crude and the petroleum market. In spite of this, retail prices saw huge increase in the beginning of post APM- era, a hike of around Rs8 in the all the cites except Delhi, where the increase was ` 6.95. Retail prices of petrol and diesel were revised for 23 times in this period, increased 14 times and reduced 9 times. 5 5 A Viable and Sustainable System of Pricing of Petroleum Products, (2010), Government of India, pp 11-13. 249
When international oil price witnessed unprecedented high throughout 2004-05, consumers were shielded from the volatility of the oil prices by reducing the excise and customs duty. Government reduced excise duty on petrol from 30 per cent to 26 per cent and on diesel from 14 per cent to 11 per cent with effective 16-6-2004. The duty was further reduced on petrol to 23 per cent and on diesel to 8 per cent with effect from 19-8-2004. Again, effective excise duty on petrol was reduced to 8 per cent and in 2007, it went down to 6 per cent. Price of diesel also has experienced the same changes in the excise duty. This was combined with reduction in the customs duty on petrol and diesel from 20 per cent to 15 per cent with effect from 19-8-2004. Further, it was reduced to 10 per cent in the next year and became 7.5 per cent with effect on 14-06-2006. When international price touched a peak in 2008, excise duty and custom duty again were revised by the Government. Excise duty became specific and it became 14.35 per litre for petrol and 4.60 per litre for diesel with effect on 1-3- 2008. However, excise duty on both products reduced marginally 13.35 for petrol and 3.60 per litre for diesel in the month of June 2008. Custom duty also reduced on petrol and diesel, 2.5 per cent with effect on 5.6.2008. With the customs and excise tariffs revised in the above lines, the road cess increased by ` 0.50 from ` 1.50. Because of these adjustments in for prices for petrol and diesel, revision in prices by oil marketing companies have been reduced after 2005. Price bond was also worked out with effect from 1st August, 2004 allowing oil marketing companies limited freedom to revise the price of MS/ HSDO within a price band. However, consequent to further rise in the international prices the price band approach was 250
given up. 6 Considering the rapid in consumption of these fuels, Government shielded the consumers from the volatility in the international prices through various adjustments. Data on wholesale price index of LPG and kerosene and its corruption is presented in Table 6.2.3.5. 6.2.3.5 Prices of LPG under Decontrolled Prices and its Consumption from 2002 to 2010 Year Wholesale Price Index increase in each year International Price ($) increase in each year Consumption (mt) increase in each year 2002-03 284 280.4 8.35 2003-04 285.5 0.53 278.45-0.70 9.31 11.44 2004-05 316 10.68 360.1 29.32 10.25 10.10 2005-06 334.8 5.95 481.04 33.59 10.46 2.10 2006-07 334.8 0.00 499.67 3.87 10.85 3.73 2007-08 334.8 0.00 683.49 36.79 12.17 12.17 2008-09 370 10.51 688 0.66 12.19 0.16 2009-10 353.1-4.57 582.69-15.31 13.12 7.63 Source : MoPNG The international price of LPG has registered an increase of 108 per cent between 2002 and 2010, whereas, percentage rise in wholesale price index was just 24 per cent. Each year changes in wholesale price index of LPG in relation to changes in international price and Indian basket of crude oil reveals that wholesale price index did not reflect the changes in international market. For instance, when 6 Bandyopahyay, Kaushik Ranjan, op. cit., pp. 37-39. 251
price of LPG declined in 2003-04 at international level, wholesale price index increased positively. Also, when there was positive increase in the international price to the extent of 29 per cent and 34 per cent in the years 2004-05 and 2005-06 respectively, the wholesale price index experienced an increase of 11 per cent and 6 per cent. Again in 2007-08, percentage increase of 37 was observed in the international price; whereas wholesale price index did not have any changes. Retail prices of LPG in four metropolitan cities are given below: 6.2.3.6 Retail Prices of LPG under Decontrolled Prices from 2002 to 2010 (` per Cylinder) Prices as on Mumbai Calcutta Delhi 01-04-2002 244.95 265.55 240.45 247.4 Chennai 01-04-2003 250.61 2.31 266.3 0.28 241.21 0.32 248.17 0.31 01-04-2004 251 0.16 266.7 0.15 241.6 0.16 248.55 0.15 01-04-2005 297.95 18.71 300.5 12.67 294.75 22.00 288.15 15.93 01-04-2006 297.95 0.00 300.5 0.00 294.75 0.00 288.15 0.00 01-04-2007 298 0.02 300.5 0.00 294.75 0.00 288.1-0.02 01-04-2008 298 0.00 300.5 0.00 294.75 0.00 288.1 0.00 01-04-2009 312.05 4.71 327.25 8.90 279.7-5.11 314.55 9.18 01-04-2010 313.45 0.45 328.7 0.44 310.35 10.96 315.95 0.45 Source : MoPNG Retail price of LPG in the four cities reflects that percentage increase has been high in Delhi with 29 per cent followed by 28 per cent in Mumbai and Chennai. Calcutta had an exact increase in the wholesale price index of 24 per cent 252
and Chennai 28 per cent. Retail prices at Delhi was revised 16 times between 2002 and 2010, increased 8 times and decreased 8 times. 7 Table 6.2.3.7 Prices of Kerosene under Decontrolled Prices and its Consumption from 2002 to 2010 Year Wholesale Price Index increase in each year International Price ($) increase in each year Consumption increase in each year 2002-03 359.7 29.24 10.41 2003-04 359.2-0.14 31.11 6.40 10.23-1.73 2004-05 357.9-0.36 49.51 59.14 9.40-8.16 2005-06 357.6-0.08 69.43 40.23 9.40 0.05 2006-07 357.6 0 77.03 10.95 9.51 1.17 2007-08 357.6 0 94.33 22.46 9.37-1.47 2008-09 357.6 0 104.37 10.64 9.30-0.75 2009-10 357.6 0 75.35-27.80 9.30 0 Source : MoPNG The wholesale price index of kerosene has remained unchanged for all the years during 2002-10. When there was single in international price of oil in 2004-05, wholesale index for kerosene decreased marginally. Thus, domestic price of kerosene was independent of the international price oil. Consumption of kerosene has declined over the years according to distribution policy of the government. 7 Petroleum Planning Cell. www.ppae.org.in 253
Chart 6.2 Wholesale Price Index of Fuels under Decontrolled Prices from 2002 to 2010 500 450 Petrol Diesel LPG 400 Kerosene 350 300 Index 250 200 150 100 50 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 254
800 Chart 6.3 Indian Basket of crude and International prices of Fuels under Decontrolled prices from 2002 to 2010 700 Petrol Diesel 600 LPG Kerosene 500 Indian Basket Crude Dollar 400 300 200 100 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Years 255
Domestic prices of LPG and kerosene were adjusted through modulation in the excise, custom duties and subsidy scheme of 2002-03. From 2002-03, when companies set prices, any hike in retail selling price of Kerosene and domestic LPG had been spared by oil marketing companies. When price spiraled in 2004, full increase in the cost was not passed on to the consumers, retail selling price of LPG just had a hike of ` 20 per cylinder but kerosene was again spared of any hike. Government has also reduced the excise duty on LPG from 16 per cent to 8 per cent on 16.06.2004 and on PDS Kerosene, from 16 per cent to 12 per cent with effect from 19-08-2004. Subsidy scheme which was decided to continue for 3-5 years from 2002-03 has been extended till 31-1-2014 in which subsidy allowed in 2004-05 was ` 22.80 per domestic LPG cylinder and Re 0.83 per litre of kerosene was retained. The consumer was protected through subsidies against the spiralling international price even when the market determined pricing mechanism prevailed. 8 From the analysis, it has been inferred that changes in domestic prices of Petrol, Diesel, LPG and Kerosene were determined by the Government in Administered Pricing and Market determined pricing mechanism. Prices of fuels did not revise in tune with international price according to import parity pricing in the decontrolled era. Price adjustments were made through subsidies and modifications in taxes and excise duty. Prices of fuels did not determined its consumption, in turn, it is consumption decided the changes in price. 8 MoPNG, op. cit., p. 26. 256