Though a truce seems to have been called for now between the Petroleum and Finance Ministries as the contentious formula of calculating the subsidy burden on oil marketing companies (OMCs) suggested by North Block honchos has been sent for review under a panel headed by Kirit Parikh, sparks are sure to fly again once the committee comes out with its report within two months as the Veerappa Moily-led ministry is of the view that it would greatly undermine profits of state-owned refiners.
The Finance Ministry in order to reduce the subsidy burden on OMCs had come up with a new formula called export parity pricing (EPP) under which the prices of petrol and diesel are to be kept at par with the prices prevailing in export market, in other words the subsidy is to be calculated without taking into account customs duty and freight charges levied on crude imports. This, the ministry feels would reduce the subsidy burden by around Rs 18,000 crore as the two components only add to the financial burden of subsidy payments.
Official sources told The Pioneer that the Petroleum Ministry as well as OMCs ironically though are not enthused with the formula as they feel that state-owned refiners' profit margins would be severely affected as they pay heavy customs duty in importing crude and pass on its cost to the customers to recover their expenses. If the EPP comes into effect, then it would hit the financials of the state-owned OMCs like Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp.
Sources further added that the Petroleum Ministry is keen that the entire process of rolling out the EPP should be delayed for as long as possible and what seems to be giving strength to it is the support being lent to their cause by some key components of the Government.
According to some highly placed sources - though the Prime Minister Manmohan Singh in a meeting held between Moily and Finance Minister P Chidambaram on May 22 to break the impasse on implementation of EPP, referred the formula to the Parikh Committee - a point of view has emerged within certain departments attached to the PMO which play a key role in formulating policies, is that the sanctity of the OMCs should not be undermined.
Being the pillars of the economy, any move which may affect the financial stability of state-owned entities, should be well pondered over before being implemented, is what a section of policy makers who have been privy to the developments related to EPP, feel.
Though the Finance Ministry after the May 22 meeting agreed to release a record Rs 100,000 crore towards diesel and cooking fuel subsidy in 2012-13, it made it clear that the next dole out, i.e. for the current fiscal, should be calculated as per the EPP.
North Block mandarins feel that the implementation of EPP would bring down the cost of crude by about $3-$4 per barrel. Under the existing formula of trade parity price (TPP, used for calculating subsidy burden), both the transportation cost and customs duty are taken into account, which the Finance Ministry feels, increases the subsidy burden.
Ironically, industry experts pointed out that while the Finance Ministry mooted the EPP only for the good of the OMCs, the Petroleum Ministry is concerned about the reduction that it will cause in the profit margins of the state-owned refiners, forcing the PM to refer the formula to the Parikh Committee.
While the panel is likely to give its report in two months time, the Petroleum Ministry's reluctance about its implementation, backed with some opposing voices among the policymakers may give the events an interesting turn in the near future.