Diesel

16 NIVESHAK
Cover Story
discounted rates; thus increasing the competition
amongst OMCs. A competitive market scenario
will surely lead to process enhancement as well
as product development which would be good
for everyone, a revolution similar to the telecom
revolution.
Auto-Industry’s Take
The auto-industry supported the diesel
deregulation, quoting that things could now be
planned in a better way by the industry with
respect to capacity building as well as by the
consumer with respect to his purchase decision.
Banking Industry’s Take
The banking industry is positive on the diesel
deregulation front as it would benefit economy
leading to a decline in inflation and thus interest
rates which will lead to a low capital cost and an
increased demand for loans.
State’s Says
Apparently the states are not much happy with
this deregulation decision as decrease in the
price of diesel would cost them tax revenue
losses, thus impacting their budgeting and
proposed expenditures.
Way Forward: Pricing still remains an
issue
There is an exigent need for some transparency
in the pricing of diesel and other petroleum
products vis a vis the method followed by the
oil companies. The concept of ‘under-recovery’
has to be given a relook and a better and more
logical price mechanism has to be implemented
so that the benefits of diesel deregulations is
harvested even in the case of volatile and high
crude prices. The concept of under recovery
is very vague and unique in India, it is the
difference between the desired selling price of
the oil companies and the prevailing retail price
in the domestic market.
This ‘desired’ price is calculated on tradeparity
basis that takes into account the landed
cost of imported fuel and the price at which
it is exported by domestic refineries. Presently,
the ratio is 80:20 in favour of landed cost. For
example, if the price on the trade parity basis is
Rs.100 per litre and the domestic selling price is
Rs.80 per litre then the under recovery reflected
in the accounts of these companies is Rs. 20.
But, in India, companies are not directly
importing the refined petroleum products instead
majority of them have developed their own
refineries and they are able to refine products
such as petrol, cooking gas and kerosene from
the imported crude. Given this situation, the
landed cost of imports which includes items
like freight, insurance, custom duties should
not be considered for setting the domestic retail
price. These factors magnify the extent of under
recoveries that the oil companies report.
Therefore, the landed cost of imports inclusive
of above mentioned items and the liveable
should not be considered for fixing the ‘desired
selling price’. The only exception could be a
point where the global crude prices surge to
the abnormal levels and the prices are linked
according to the crude prices. Instead of that,
the below mentioned proposed cost plus
method should be mandated by the government
in order to protect the consumer interest and
promote efficient competition in the sector.
The oil companies harp on “under recoveries”
and always nag about linking the domestic price
with it. The reason being the landed cost which
includes all the duties and liveable actually
serves as a shield to protect their actual losses
from the inefficiencies in their refineries and
NOVEMBER 2014