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Business
The transitional phase
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With the dismantling of the APM and liberalisation of the oil sector, the entire system of subsidies for products now becomes more transparent, says Sushma Ramachandran
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THE DISMANTLING of the administered pricing mechanism (APM) for the petroleum industry has meant the reversal of steps taken to create an elaborate regulatory infrastructure when the multinational oil companies were nationalised in the early 1970s. The three decade old APM was created through a complex system of oil pool account which was kept out of the general Exchequer. The Oil Coordination Committee (OCC) was then set up to supervise not just the oil pool account mechanism but the distribution of oil products throughout the country and import of petroleum products by the canalising agency, the Indian Oil Corporation.
As the oil pool account was not part of the general Exchequer, the surplus or deficit was always kept closely guarded secrets by the OCC and the Petroleum Ministry.
The ostensible aim for this secrecy was to provide the country a balancing mechanism in case of volatility in international oil prices. Thus, the surplus in the oil pool account would enable the country to meet the demand for foreign exchange in case prices rose suddenly in world markets. This was the theory but in practice when the surplus in the account rose to around Rs. 7,000-8,000 crores about a decade ago, the funds were gradually transferred to the general Exchequer to reduce the budgetary deficit. As a result, when the Iraq-Kuwait conflict took place and prices skyrocketed, there was little surplus left in the pool account to provide any cushion and the Government was forced to raise prices of petroleum products.
With the dismantling of the APM and liberalisation of the oil sector, the entire system of subsidies for products now becomes more transparent. Under the APM, products such as motor spirit (petrol) were priced far higher than the actual cost to subsidise products such as kerosene and LPG.
It was a complex system of cross-subsidisation and ensured that the general budget was not burdened with subsidies for the petroleum sector. As these subsidies have been formally transferred to the Consolidated Fund of India, petroleum product prices will become market-driven. Similarly, subsidies for products such as kerosene and LPG become transparent and the actual impact on the economy is clearly visible.
Privatisation of HPCL, BPCL
In a simultaneous programme, the government is proceeding with the privatisation of Hindustan Petroleum Corporation (HPCL) and the Bharat Petroleum Corporation (BPCL). Thus not only is the old regulatory framework being dismantled, the nationalised oil companies are being gradually privatised once again. HPCL was formed after nationalisation of the U.S. oil major, Caltex and BPCL were created after taking over the erstwhile Burmah Shell Company. The IBP — Indo-Burma Petroleum Company — has already been sold but to another public sector company, the IOC.
The stage has, therefore, been set for the "emergence of a free and globally competitive market with minimal intervention".
The official notification dismantling the APM says the envisaged benefits of the decision include improved competitiveness of the domestic petroleum industry, creating market conditions necessary to attain an economic pricing regime for petroleum products and providing subsidies in a more transparent manner through the budget.
Key changes
The key changes in the petroleum sector are that consumer prices of petrol and diesel have become market determined. As industrial products such as LSHS (low sulphur heavy stock) and fuel oil are already linked to import parity prices, all oil products barring kerosene under the public distribution system and LPG for domestic use will now be sold at market prices. Secondly, PDS kerosene and domestic LPG will carry subsidy at a specified flat rate basis. After adjusting the flat rate of subsidy, retail prices of these products will vary with the international oil prices. Subsidy on these will also be phased out in three to five years.
Thirdly, the Government will continue to provide freight subsidies for supply of PDS kerosene and domestic LPG in far flung and hilly areas. Fourthly, pricing of indigenous crude oil by the Oil and Natural Gas Corporation and Oil India Limited becomes market determined. Finally, the OCC has been abolished and the oil pool account has been wound up.
The outstanding dues of the oil companies against the pool account will be liquidated by issuing government bonds of Rs. 9,000 crores to the companies concerned immediately and for the balance amount settling pending claims and completion of audit by the Comptroller and Auditor General (CAG).
To ensure that the transition to the new deregulated scenario is smooth for the consumer, the Petroleum Ministry has directed the oil companies to keep prices stable for the next few months despite the fluctuations in world prices.
After this transitional phase, however, consumers will have to get used to periodic revisions in prices linked to the international markets. At present, world crude oil prices have risen steeply and oil companies are gearing up to raise rates.
Conversely, the consumer will gain the advantage when prices soften internationally. Besides, demand and market constraints will now come to the fore as the multiplicity of players will force Indian oil companies to offer better quality products at the most competitive rates.
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