Dalal Street Investments

Kirit Parekh’s Views on Oil & Gas – Live

June 7, 2010

In a conference call Prof. Kirit Parikh, ex-member, Planning Commission, and chairman of the expert group constituted by the Government on sustainable petroleum pricing, to share his views on the Indian energy sector and related issues in the broad economy.

Here are the key takeaways from the Conference Call with Kirit Parekh
Near-term impact on inflation and fiscal balances would be more than offset by the long-term benefits of fiscal stability for the Government. Current market conditions, esp. commodity prices would limit the impact.

The Govt. could either 1. Deregulate auto fuels, eliminating the fiscal burden, or 2. Follow an incremental approach, raising prices by Rs3-3.5/l as a short-term solution. While both approaches would be difficult politically, with inflation ~10 levels, Prof. Parikh observed that allowing competitive market forces to impact prices was preferable to the current fixed-price regime, which would also insulate the Govt.’s fiscal balances on a broad band of crude levels (US$40 to US$70). Prof. Parikh also observed that the inflationary impact of such a move needs to be studied vis-à-vis the current regulation of high taxes, and then compensating downstream oil companies with oil bonds and upstream revenues.

Another reform on the cards is a reduction/elimination of excise duties on auto fuels.1 The fall of ~Rs20,000cr in tax revenues would be partially compensated by the lower under-recoveries of downstream oil companies. Prof. Parikh noted that under recoveries of OMCs are not subsidies, as suggested in the recent representation to the G-20 countries on phasing out inefficient subsidies—net of indirect taxes, prices of fuels in India remain internationally competitive. Subsidies to Kerosene and LPG are largely to the lower economic strata, and there’s case for that, despite ~30% loss in diversion.

The EGOM will take the decision this evening. Stay tuned.


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