The big challenge of freeing up kerosene price

The staggered increase in kerosene rate may not have the same impact of freeing up the fuel price as for diesel, says Jyoti Mukul.

Letting go of pricing control on a sensitive commodity can be hard for any political dispensation, but both petrol and diesel were decontrolled between 2010 and 2014.

The decisions were made not just because the government was favourably inclined, but also because a window of opportunity was thrown open by the low differential between the market-determined prices of petrol and diesel and what consumers actually pay for them.

Now, the government is tackling freeing up prices of the other two “sensitive petroleum products” in its basket: Kerosene and LPG.

It has modified and rechristened the United Progressive Alliance government’s scheme for delivery of LPG subsidy through direct benefit transfer as PAHAL, and is pursuing it more aggressively.

Simultaneously, it launched the ‘Give It Up’ campaign to urge people to voluntarily surrender their subsidy. And, close on its heels came the politically risky initiative of making people declare their earnings and taking away their entitlement of LPG subsidy if their income was beyond Rs 10 lakh annually.

However, the government is moving cautiously. Apart from capping annual sales of subsidised gas cylinders to 12, it has shied away from any pricing reform for LPG.

In the case of kerosene, a more sensitive fuel than LPG, the reform has come on the lines of diesel through staggered increase in price.

The diesel success, however, cannot be replicated here, points out an official.

For one, the 25 paise monthly increase in kerosene prices that oil companies have been allowed until March 2017 will shrink their current under-recovery of Rs 13.12 a litre by only Rs 2.25 at the end of nine months.

This means unlike diesel, the staggered increase is not till full market parity is achieved. Besides, the Union government is not giving up its control over the fuel.

Since subsidised kerosene is sold only through a state’s public distribution system (PDS), its price is notified by state governments.

This is not the case with the other three fuels. Oil marketing companies notify the price themselves and convey it to their dealers.

However, companies take a two-step approach for selling kerosene.

Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation sell kerosene from their depots to state-appointed dealers at a Union government-determined price.

The state governments then notify the price, which are followed at their PDS outlets.

One step at a time

The government official quoted earlier insists that kerosene is more akin to LPG than diesel.

“Right now this decision (staggered increase) is not certain to go beyond March 2017. A lot will depend on how global prices move and what kind of political reaction it will draw,” he says.

The difference between the market and subsidised price was just Rs 3.50 a litre for petrol, so an equivalent price increase necessitated by decontrol was not a tough call for the government.

For diesel, it was even easier: in the preceding three fortnights the decision to decontrol the fuel in October 2014, oil marketing companies were making an “over-recovery” on the price charged to consumers.

The under-recovery gap for kerosene is much more at Rs 13.12, translating to 86 per cent increase in the retail price.

An immediate decontrol, therefore, is ruled out. Reducing the under-recovery on kerosene through nine installments of 25 paise each till March 2017 will mean only17 per cent coverage of the revenue loss.

However, the Rs 2.25 increase every month will help the balance sheet of oil marketing companies next year even if the government decides to discontinue the process.

This is because the government bears only 82 paise a litre subsidy on kerosene, making oil marketing and upstream oil and gas companies take the brunt of the under-recovery burden.

For 2013-14 and 2015-16, the government did not share the subsidy cost at all, even as at the aggregate level the under-recovery on kerosene was at a 10-year low of Rs 11,496 crore (Rs 114.96 billion).

Oil and Natural Gas Corporation and Oil India, the upstream companies, will benefit the most from the move as they have to share the under-recovery cost of kerosene only if the revenue loss crosses Rs 12 a litre.

“The upstream companies would be major beneficiaries of the reform, especially at the current or higher level of crude oil prices. At an Indian basket crude oil price of $44-45 a barrel, the kerosene subsidy tends to be around Rs 12, implying no subsidy burden on PSU upstream companies,” it said in its report on Wednesday.

ICRA further said the move to increase retail prices of subsidised kerosene by Rs 0.25 a litre per month would lead to an overall reduction in gross under-recoveries on kerosene by Rs 760 crore (Rs 7.6 billion) in 2016-17 and Rs 2,040 crore (Rs 20.40 billion) in 2017-2018.

Although the fall in gross under-recoveries for kerosene is marginal against the projected under-recoveries of Rs 23,000 crore-35,000 crore for 2016-17, new kerosene prices will also be marginally positive for oil marketing companies as it would cut their dependence on the government or the upstream companies and to an extent crimp their working capital and interest cost, it said.

A big help

While the staggered increase in prices of kerosene might not have much of an impact on the overall under-recoveries, what will lend a fillip to the government’s policy to cut subsidy is the direct benefit transfer (DBT) aimed at preventing misuse of the subsidy.

However, DBT for kerosene, which was to be launched in April, is yet to take off as states are still in the process of seeding bank accounts of beneficiaries with their PDS data.

The government’s Ujjwala scheme under which BPL households are given LPG connection for free if they agree to give up on using kerosene could help as well.

For more than five years now the government has been reducing the kerosene quota for states based on two criteria: LPG penetration and the level of electrification.

Earlier the cut in quota was conservative at 2-3 per cent but now the government seems keen to speed things up.

Chandigarh and Delhi are close to becoming kerosene free while Karnataka has committed to reducing consumption substantially.

Clearly, the government’s approach towards reducing kerosene subsidy is not only unique, but also has wider implications on the Centre-state relations.

Ending Fuel Price Control

Petrol

In June 2010, it was decontrolled in one go

Diesel

January 2013

A monthly 50 paise increase in price introduced

Sale at retail outlets and to bulk consumers to attract different prices

October 2014

Complete decontrol achieved

LPG

January 2013

Cap on number of subsidised cylinder fixed at six but raised to nine