Pricing of petroleum and LPG
- May 22, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Pricing of petroleum and LPG
Section: Monetary Policy
Consumer Price Index (CPI) surged to an eight-year high of 7.79 per cent in April, while producers’ inflation based on Wholesale Price Index (WPI) crossed all-time high in the latest series at over 15 per cent in April.
Recently Government took several steps to curb Inflation:
- Reduction of the Central Excise Duty on petrol by ₹8 per litre and on diesel by ₹6 per litre. (the reduction has been done in the cess and not in the Basic Excise Duty).
- Subsidy on cylinder-Ujjawla beneficiaries will get a subsidy of ₹200 per cylinder for consumption up to 12 cylinders a year.
- Reduction of Customs duty on raw materials for plastic, iron and steel.
Pricing of petroleum:
- Base price-India imports almost no petrol or diesel. It imports crude. But the price paid on fuel is based largely on import parity price, or the price you would pay if India were to be actually importing petrol or diesel
Oil refiners, who make these products (petrol and diesel) in India, are paid what is called a Refinery Gate Price (RGP) based on the Trade Parity Price (TPP) which is a weighted average of the Import Parity Price (IPP) and the Export Parity Price (EPP). IPP is the price importers would pay if they actually imported the product. So, it includes not just the cost of the fuel itself, but also freight charges, insurance, customs duty and port charges. EPP is what somebody actually exporting the product would get. IPP has an 80% weight and EPP only 20% in the TPP.
Implication-Indian refiners would get this benefit without incurring the duty itself. This partly explains why they have actually become more profitable at a time when their raw material (crude oil) is becoming more expensive.
The Centre charges excise duty on the base price –accounting for 26 per cent and 23 percent of the final price of petrol and diesel, respectively. There are four components of the Central Excise Duty on petrol and diesel.
- Basic Excise Duty-Centre levies excise at specific rate , that is, Rs X a litre and States/Union Territories levy at ad valorem, that is, at a percentage of the total value.
- Special Additional Excise Duty
- Agriculture Infrastructure & Development Cess (AIDC)
- Road and Infrastructure cess
Among these four components, money collected through the Basic Excise Duty is part of the Devolution Pool.
The dealer’s commission-amounts to another 4 and 3 percent of the selling price of the two petroleum products.
The States levy value-added tax (VAT) -on the cost of petrol and diesel, including excise duty and dealer’s commission.
|Import Parity Price (IPP) – IPP represents the price that importers would pay in case of actual import of product at the respective Indian ports and includes the elements of Free on Board (FOB) price + Ocean Freight + Insurance + Custom Duties + Port Dues, etc.
Export Parity Price (EPP) – EPP represents the price which oil companies would realize on export of petroleum products. This includes FOB price + Advance License benefit or ALB for duty free import of crude oil pursuant to export of refined products. Consequent to abolition of Customs Duty of Crude oil effective 25.06.2011, the ALB is currently zero.
Trade Parity Price (TPP) – TPP consists of 80% of Import Parity Price and 20% of Export Parity Price.
Pricing of LPG:
The price of LPG is revised in India as per a formula known as import parity price (IPP). The common practice is to revise the price of LPG cylinders on a month-on-month basis.
The IPP is calculated as per Saudi Aramco’s LPG price, the world’s largest producer. The price includes costs like free on board (FOB) price, ocean freight, custom duties, port charges and insurance cost among other things. The price thus calculated in US dollars is then converted to Indian rupees.
To the international price, charges added domestically include inland freight costs, Oil companies’ margins, bottling costs, marketing expenses, dealer commissions and the Goods and Services Tax (GST). The final price thus calculated gives the retail selling price for non-subsidised cooking gas cylinders for consumers across different states.
Many people in India avail subsidies offered by the central government on LPG cylinders. The subsidy amount is subject to change from one month to the next based on the international price of LPG and fluctuations in currency value.
An increase in international LPG prices or weakness in the rupee, or both, translates into higher LPG prices in India.
The international price for LPG fluctuates in accordance with the price of its main raw material, crude oil.
|The Refinery Gate Price (RGP) of kerosene sold in the public distribution system is based on IPP.