Pricing of Major Petroleum Products in India
Posted: 26 Apr 2010
Date Written: April 23, 2010
There are three key parties involved in the process and who are affected by decisions on pricing and subsidies. They are the consumers, oil companies and the government.
The OMCs sell fuels to the end consumers. The government subsidizes the consumers through administered low price under the pretext of welfare measures. Since the OMCs are advised to sell their produce below cost, the government compensates 33% of the under recoveries through subsidies and issue of oil bonds thus creating a subsidy tangle.
Oil Taxes: There is a fairly widespread perception that the government is over taxing oil products but trying to portray a picture that they are losing money through sales of petroleum products. This school of thought argues that oil is taxed highly in India. The Oil Marketing Companies, on the other hand, have been pitching for a free pricing regime. The Government, on the other hand, has been trying to make good the losses suffered by these companies through various mechanisms including resorting to Oil Bonds and duty cuts. It has been trying to balance between rate hikes and inflation. Approximately a Re. 1 hike in Diesel prices cause inflation to raise 100 basis points. Consumers on the other hand are used to the low prices they pay for the precious fuel they obtain. Hike in fuel prices is met by vociferous protests from this pampered segment as well as the political parties sitting in the opposition benches.
This paper seeks to unravel the puzzle of oil prices and clarify on various complexities present in oil prices as well as to objectively position India on the world map. In order to decode the oil mystery, we from the perspective of all three stakeholders viz. – the government, consumers and OMCs.
Keywords: Pricing, Petroleum Products, India
JEL Classification: D40, P22
Suggested Citation: Suggested Citation