>OIL MARKETING COMPANIES:Fueling fiscal prudence

Moving Towards Market Driven Price Regime:
Over the years the Indian Government has followed the policy of Administered Price to shield
the consumers from severe fluctuations in the international oil prices. This protective policy has
not only added to burgeoning fiscal deficit, but also resulted in huge under recoveries on the part
of Oil Marketing Companies (OMC’s). Sowing the seeds for moving from a controlled regime to
decontrolled regime, the administered price mechanism (APM) governing prices of auto fuels
was completely dismantled in April 2002. However, given the sharp increase in crude oil and
petroleum product prices over the past 5-6 years, the government continued to play a significant
role in the determination of auto fuel prices. However, now the Government has a target to
reduce fiscal deficit to 4% of GDP by FY12 from the current levels of 6.8% of GDP. In this
context, the move to deregulate petrol prices and allowing it to be determined by the market is
significant.

Impact on OMC’s:
Market driven price regime is expected to ease the pressures on OMC’s by reducing their under
recoveries. The pre-price revision, total estimated under-recovery on cooking and auto fuels is
estimated at Rs 801 bn. Out of this, the total under recovery for petrol would have been to the
tune of Rs 70 bn and for diesel Rs 230 bn for the whole year, if the prices would not have been
decontrolled. Under-recovery in auto fuels is expected to reduce from Rs 3.8 per litre (before
price revision) to Rs 1.9 per litre (after price revision) in 2010-11. Similarly, the estimated under- recovery on cooking fuels is likely to fall from Rs 465 bn to Rs 398 bn in 2010-11. The total under-recovery is estimated to fall to Rs 565 bn post price rise.

Impact on Consumers:
From now onwards, the fluctuations in international markets would get directly reflected in the
domestic market. However, the price hike will be done in a phased manner. Further, the
Government is expected to intervene, in case of very volatile increase in international fuel prices.
As of now, the government has approved the increase in the price of petrol, diesel and LPG. The
Empowered Group of Ministers (EGoM) has decided to permit Oil Marketing Companies
(OMCs) to raise the retail-selling price of petrol by Rs 3.5 per litre, diesel by Rs 2 per litre. For
an average car user the increase in petrol price would add a burden of Rs.150 per month while
for a motorcycle user the burden would be Rs.30-35 per month.

To read the full report: OMC