Analysis of the Kirit Parikh

Committee Recommendations

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February 5, 2010

Kirit Parikh Committee recommendations are positive, but implementation is the key

An experts group, headed by former Planning Commission member Kirit Parikh, submitted its much
awaited report on pricing policy for four major oil products, namely, petrol, diesel, kerosene and LPG.

The committee has recommended that prices of petrol and diesel to be market-determined, both at the
refinery gate and retail levels, whereas the prices of kerosene and domestic LPG can be partially raised
by Rs 6 per litre and Rs 100 per cylinder respectively. For kerosene and LPG, the committee has
recommended linking fuel prices with per capita income and selective allocations to poorer families
through smart cards linked with unique identities (UID) project.

The committee has accepted the subsidy formula proposed by Oil and Natural Gas Corporation
(ONGC) aimed at reducing burden of oil companies. The formula suggests an incremental rate of taxes
on higher crude oil price realization from the nomination blocks of ONGC and Oil India Ltd (OIL).
The proposed subsidy sharing formula shall keep the government’s subsidy contribution from budget
in the range of Rs 19,780-23,340 crore at various crude price levels. A summary of recommendations
and their impact has been provided in Annexure.

According to D.R.Dogra, Managing Director & CEO , CARE Ltd. “ The impact on the oil and gas
industry, if any of the recommendations by the committee is implemented, will be extremely positive”
The complete deregulation of auto-fuels and sharp hikes in the prices of cooking fuels would help the
government in reducing fiscal deficit and thus curtail its borrowings. The three public sector oil
marketing companies, namely, Indian Oil Corporation, Bharat Petroleum Corporation Ltd and
Hindustan Petroleum Corporation Ltd, would be able to reduce their under-recoveries considerably.
However, the complete deregulation may prompt private players such as Reliance, Essar and Shell to
re-open their retail fuel outlets, putting pressure on market share of public sector oil marketing
companies (OMCs). In the past, the entry of private players in retail fuel market had resulted in an

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erosion of about 10 per cent in the market share of public sector OMCs. The proposed hike in prices
of cooking fuels coupled with reduction in allocation of kerosene under the public distribution scheme
(PDS) by 20 per cent would reduce under-recoveries by about Rs 16,454 crore, whereas, the auto-fuel
deregulation would avert Rs 13,997 crore of under-recoveries.

In the opinion of CARE Research, this is a landmark report, but implementation is the key. Although
the report is in line with the wish-list of most of the market participants, implementation of the
recommendations needs to be keenly watched for. “The situation is tricky for the Government, as it
needs to strike a balance between reducing the subsidy burden on the public sector oil and gas
undertakings, reducing the fiscal deficit and managing the current inflationary scenario, given the
economy being in the process of revival and attempting to restore its buoyancy” added Mr Dogra. It
may be noted that similar kind of recommendations made by the Chaturvedi committee in 2008 were
rejected by the government. Also, practicability of the selective allocations to poorer families through
smart cards linked with UID project also needs to be evaluated by the government keeping in view the
infrastructure requirement for the same. Although diesel is a major contributor to the total under-
recoveries, its deregulation needs to be carefully evaluated as the agriculture sector (consuming 12 per
cent of diesel) and transport industry (consuming 40 per cent of diesel), the backbone of the Indian
economy, are the major consumer of the fuel.

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 Annexure
Summary of Recommendations by the Kirit Parikh Committee
Fuel Pricing Reasoning Under-recoveries
1) Small impact on inflation.  
Market-determined both at the refinery gate
2) Primarily used by the upper 2-3% of Nil if recommendations are
and retail levels. Price hike of around Rs.7/litre
Petrol household.   accepted. No comments on
and Rs. 23/litre at the oil price of $80/bbl and
3) Incentive to increase vehicle efficiency by calculation methodology.
$120/bbl respectively.
20%.
1) Agricultural Sector (12% consumption) -
Adjust MSP to account for rise in prices.  
2) Trucks and LCV (40% consumption) -
Market-determined both at the refinery gate Incentive to increase efficiencies.  
and retail levels. 3) Industrial users would be able to fully-pass on
increased price, resulting in similar inflationary Nil if recommendations are
Diesel impact as subsidies.   accepted. No comments on
4) Car owner - No social reason to subsidize. calculation methodology.

An additional excise duty on a diesel vehicle to

Differential taxation on petrol and diesel causing
bring it at-par with petrol driven cars. At the
more usage of diesel. Petrol and Diesel tax
current levels of usage, an additional excise
should bring on parity.
duty payable amounts to about Rs.80,000/year.
Price of PDS kerosene be raised by Rs.6/litre Only 1.3% of rural household use PDS
(~66% hike) to around Rs. 15/litre and should Kerosene for cooking purpose. Among the No comments on calculation
be revised every year in-line with per capita poorest 4%, 60% use PDS Kerosene for methodology.
agricultural GDP at nominal prices. lightening purpose.
Rationalize distribution of PDF Kerosene to
Out of the current norm of 5 litres/household Reduction in allocation by 20%
BPL families to 2 litres per month. Promote
PDS per month, most of the households use only 3.5 would reduce subsidies by Rs.
rural electrification, LPG distribution for
Kerosene lightening purpose. litres per month. 3,484 crore.

Distribution of PDS Kerosene to BPL Reduced adulteration. Estimates suggest 35% or Increase in price by Rs.6/- on the
familities through smart cards with biometric more of PDS kerosene is diverted for reduced quantity would reduce
identification linked with UID project. unauthorized purposes including adulteration. subsidies by Rs. 5,390 crore.
Bring down the all india allocation by at least
20%.
1) High unintended uses. 2) Rural households
Increase the price of domestic LPG cylinder resort to alternative fuels. 3) Subsidies to the No comments on calculation
(14.2 kg) by at least Rs. 100. The price should targeted group such as the BPL rural households methodology. Increase in price
LPG
be periodically revised based on the per capita can be delivered as entitlements or through by Rs.100/cylinder would reduce
income. direct cash transfers to be given to the woman subsidy burden by 7,580 crore.  
of the household.
Accepted the formula proposed by ONGC, The formula shall keep the
Subsidy involving incremental tax rates on higher crude government’s share in the range
Sharing oil price realization from the nomination of Rs 19,780-23,340 crore at
blocks. various crude price levels.

Government is currently preparing roadmap for

No comments the introduction of the Goods and Services Tax
Taxation
(GST) with effect from 1st April, 2010.
No windfall taxes

Source: Compiled by CARE Research