Oil Price Reforms: Kirit S. Parikh Committee Recomendations

Kirit S. Parikh, Chairman, Integrated Research and Action for Development (IRADe), presented a report of the Expert Group on A Viable and Sustainable System of Pricing of Petroleum Products on February 4, 2010.

Who is Kirit S Parikh?
Dr. Kirit S. Parikh is Founder Director of Indira Gandhi Institute of Development Research (IGIDR), Mumbai. He has also served as Senior Economic Advisor to United Nations Development Programme from October 1997 to September 1998. He has been a member of the Economic Advisory Council (EAC) of the Prime Minister of India, Atal Bihari Vajpayee, and had been a member of EAC of Prime Ministers Rajiv Gandhi, V.P.Singh, Chandra Shekhar and P.V. Narasimha Rao. He has also been member of Planning Commission.

He has been the editor of "India Development Reports" which provide a non-governmental assessment of India's development and policy options and member of numerous other boards. He is an author and co author of 15 books in the areas of planning, water resource management, appropriate technology for housing, optimum requirement for fertilizers, energy systems, national and international food policies, trade policies, general equilibrium modeling and natural resources accounting.

When this committee was Constituted?To advise on a viable and sustainable system of pricing petroleum products the establishment of a committee was announced by finance minister Pranab Mukherjee while presenting Budget 2009-10 on July 6, 2009. Dr. Parikh was appointed the chairman of this panel in August 2009.
The committee’s other members were: Indian Council for Research on International Economic Relations chairperson Isher Judge Ahluwalia, National Council of Applied Economic Research director-general Suman K Bery, Finance Secretary Ashok Chawla and Petroleum Secretary S. Sundareshan.

What are Key Recommendations?

1. Domestic petroleum product prices have to reflect that of international prices. The government should allow pass-through of international oil prices to domestic users. This will enable the public sector OMCs and upstream oil companies to remain financially stable and solvent.
2. There is no justification for continuance of subsidy for diesel and petrol and as such their prices should be raised by Rs 2.33 per litre and Rs 4.72 per litre respectively
3. An additional excise duty of Rs 80,000 per vehicle should be levied on diesel car owners
4. Smartcards should be used to provide subsidy to the target/needy group on kerosene and 14.2 LPG cylinders. Subsidy on LPG cylinders should be discontinued immediately except for the below the poverty line households.
5. The price of kerosene should be increased by Rs 6 per litre and that of LPG by Rs 100 per cylinder. The kerosene price increase should be in line with the nominal growth in agricultural GDP. LPG price should be increased in line with per capita income.
6. The government’s policy of incurring a cost of Rs 1.42 lakh crore towards compensating the OMCs for the under recoveries is a complete failure. The compensation burden has reached a level of 25 per cent of total revenue receipts in 2008-09, which is totally unviable and perilous to the long-term health of the economy.

The committee suggested that LPG and kerosene prices could be raised every year in step with the growth in per capital agricultural GDP at nominal rates and per capita income respectively. Freeing petrol and diesel prices would not only promote competition but also lead to more equitable sharing of inflation burden, affecting mostly people who can pay.