Meeb Assignment on 'Impact of Dismantling Administered Prices on Petrol and Diesel in India'

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Impact of dismantling Administered Prices on Petrol and Diesel in India

Xavier Institute of Management Bhubaneswar (XIMB) EPWP Batch II (2011-12) Macro Economic Environment of Business (MEEB)

Prepared by
Name :- Priyanka Sharma Roll No:- U811026

Professor
Dr. Latha Ravindran

Date
03/Dec/11

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INDEX S.No 1 2 3 3.1 3.2 4 5 6 Introduction Objective Detailed Analysis for crucial & main issues Need for deregularisation Impact of dismantling Administered Prices on Petrol and Diesel in India Observations Conclusion Bibliography Contents

Page 3 4 4 4 6 7 8 9

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1.Introduction:In India fuel prices were controlled by government .Although government announced the dismantling of Administered Price Mechanism (APM) effective from 01/Apr/2002 in order to move towards market prices for petroleum products. In the context of the study, Administered Pricing Mechanism refers to the mechanism under which the prices of raw material, transportation and those of the finished products are regulated by government .In the case of Oil industry, the production, prices and distribution of the crude oil and petroleum products were being administered by Ministry of Petroleum & Natural Gas. The APM has been dismantled in phases which started from April’98 and got completed by the end of March’02. Dismantling of APM means decontrolling or deregulating of the petrol prices that means government will no longer be subsidizing petrol prices and the prices will be purely linked to the international crude prices .In the case of diesel , though ,it will be only partially regulated (the reason may be to avoid sudden hike in inflation) . LPG and Kerosene will continue to be subsidized. Below Graph showing the hike of Petrol prices from 1989 to 2011 drawn for India’s 4 Metro Cities

Delhi Petrol Prices Trend

Mumbai Petrol Prices Trend

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Kolkata Petrol Prices Trend

Chennai Petrol Prices Trend

2. Objective:Objective of the assignment is to do detail analysis about reasons behind the dismantling of Administered Price Mechanism and its impact in India.

3. Detailed Analysis of Crucial and Main Issues:The government of India has defiantly taken a bold decision to deregulate petrol (partially) prices in India. and diesel

Pricing of Oil products has always been a political issue than an economic one in India but the circumstances aroused so in front of government that it became necessary to dismantle prices on Petrol and Diesel. When the government was surrounded in a political fire fight over recent petrol hikes ,NCP head Sharad Pawar supported prime minister Manmohan Singh and said “ What PM has done is right, those who understand economics will agree” (Times of India November 6,2011) Now we will analyze from economic point of view that what was the reason behind need of deregularisation 3.1 Need for deregularisation: During the last 6-7 years demand for petroleum products has increased sharply but investment in the industry has not kept pace with the demand resulting in large imports of crude and finished products which is one of major contributor of ‘Fiscal deficit’. Now the government could not afford to further carry subsidy on Petrol and Diesel.

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Fiscal deficit figures has been shown in the below table :-





When crude was boiling at 140 $ per barrel ,government intervention to increase fuel prices came too late .At that time OMCs (Oil Marketing Company) were losing around 500 crs a day. Such kind of looses affects health of the OMCs .They cannot go ahead with their expansion plans because of uncertainty of under recoveries. An Attempt to Estimate Petrol Production Cost :As of today, the crude oil costs $100 (01/Dec/11 from Bloomberg) a barrel (159 liters) ,since this has to be transported to India via marine root , there is a shipping cost. Let’s say it’s something like 10%.Hence by the time crude arrives at India, its already costing...
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