The Petroleum Ministry has suggested a new oil-pricing formula to Prime Minister Manmohan Singh under which if PSUs were to raise the price of petrol and diesel today, the hike would be about Rs 2.02 per litre for petrol and Rs 1.30 for diesel. The Ministry has also argued for delaying the phaseout of subsidy on LPG and kerosene so that its price hike is more ‘‘gentle’’: Rs 1.59 per litre for kerosene and Rs 29.60 per LPG cylinder. LPG and kerosene prices have been unchanged since March 2002 and petrol and diesel rates since January 1 this year. The proposals have been forwarded to the Finance Ministry for finetuning and inclusion in the forthcoming budget in the first week of July after consultation with allies. For prices of petrol and diesel, the Ministry’s formula fixes it as per a band of $2 above and below the average price of international crude over the last three months. Given that this average over March, April and May is about $33.50 per barrel, a $2-ceiling works out to a 6% hike. Translating this to current retail prices of petrol and diesel, the maximum that oil companies can raise it by would be Rs 2.02 for petrol and Rs 1.30 for diesel. North Block officials said that under this formula, government intervention is warranted only if international oil prices breach this $2-ceiling or fall below the $2-floor. The Finance Ministry has been asked to levy a specific excise duty on petrol and diesel instead of ad valorem rates. Excise duty in percentage terms meant consumers paid more each time global prices shot up. Consumers pay excise of 30 percent plus Rs 7.50 per litre on petrol and 14 percent plus Rs 1.50 per litre on diesel. Without these measures, oil firms would have to raise petrol prices by Rs 3.53 per litre and diesel by Rs 2.25 per litre to offset nearly 18 percent increase in global prices of both products. As for LPG and kerosene, oil firms would be advised to raise their price in a phased manner to avoid any shocks. And to offset losses that they suffer on selling both products below cost, the ministry has proposed a reduction in customs and excise duties. It has asked that the import duty of 10 percent be abolished while the excise duty, which was doubled to 16 percent in March 2002, be brought back to 8 percent. More relief has been suggested for oil firms through subsidy from the national exchequer for five years instead of previous government’s proposal to end it after three years on March 31, 2005. That would mean larger subsidy outgo from the budget since reductions would be by 20 percent each year instead of previous 33.3 percent. If these proposals are accepted, the increase in LPG and kerosene prices would be Rs 29.60 per cylinder and Rs 1.59 per litre instead of the required Rs 133 per cylinder and Rs 4.43 per litre. However, in return for relief in duties and extension of subsidy period, oil companies would be told to set up a Crude and Petroleum Product Stabilisation Fund. The monies from fund would be used to moderate impact of any abnormal rise or fall in international prices.
