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Government plans to change pricing methodology of diesel, LPG

08 Jul 2013 Evaluate

In a move to reduce subsidy burden, the government may change the pricing methodology of diesel and LPG rates as the rupee depreciation is making it difficult to curb the burgeoning subsidies. The total subsidy for selling diesel, kerosene at LPG at rates below cost was put at Rs 80,000 crore in April’13, which has now climbed to Rs 125,000 crore owing to the major fall in rupee value, which has made imports costlier.

Meanwhile, the government had constituted a panel under former Planning Commission member Kirit S Parikh to suggest a suitable pricing mechanism. Earlier, the oil ministry has asked the committee to revisit the current pricing methodology of import party/trade parity for diesel, PDS kerosene and subsidised domestic LPG and suggest a suitable pricing mechanism for sale of these products. However, as the government has approved a shift to export parity pricing (EPP) for refinery output, the ministry has asked the panel to revisit the current pricing methodology of petroleum products, and suggested a pricing mechanism benchmarked to export parity pricing, which is also related to the actual export realisation of the petroleum products exported from India by private refiners. The panel report will become the benchmark for subsidy calculations.

Presently, diesel is priced at trade parity, in which 80 percent is import price and 20 percent is export rate. Kerosene and LPG are priced at import parity. With a move to shift to export parity pricing, the government can cut its huge subsidy burden. With export parity pricing, the government would have cut the subsidy on diesel by Rs 14,372 crore to Rs 77,689 crore in 2012-13. Further, Rs 2,245 crore would have been saved on LPG and Rs 1,001 crore on kerosene. The saving would come from the removal of import duty and notional transportation cost in the import parity price.

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