Why is India not able to reduce motor fuel prices when there is a fall in international crude oil prices, while China can?
This is because, say those who track the industry, in China the retail price is closely linked with international price, while in India the companies still continue to sell at a Government controlled price. And, currency fluctuation is an important component.
Weakening Rupee
The rupee in relation to the dollar has weakened and this has had an impact on the losses of public sector oil retailers. The exchange rate, which was around Rs 46 at the beginning of September, has now reached the level of Rs 49.07 against a dollar.
India imports 83 per cent of its crude oil. The price at which Indian refiners buy their crude oil stood at $108.90 a barrel (Rs 5,343.72 a barrel). Petrol in China is being sold at about Rs 74.46/litre, and diesel at Rs 67.92/ litre. In India petrol is sold at Rs 66.84/ litre (Delhi rates), diesel Rs 40.91/ litre.
What happens in China
Analysts told Business Line that in China the regulation of oil products prices is done by the National Development Reform Commission (NDRC), a state-owned body.
NDRC adjusts the wholesale (ex-refinery) prices of petroleum products when international prices move beyond a certain band over a certain number of days. This band and the number of days have been reduced progressively to tighten the linkage with international prices.
In 2009, China adopted an oil pricing mechanism that allows the economic planning agency to adjust retail fuel prices when world crude oil prices change by more than four per cent over 22 straight working days considering a crude price upper limited of $130 a barrel.
As crude oil prices escalated again in 2011, regulated prices failed to keep up – leaving refiners recording significant losses in first half of this year.
Analysts say that historically China has compensated its two largest oil companies – Sinopec and PetroChina – on refining losses. For the third consecutive year, in 2008, Sinopec had reported receiving compensation for its refining losses of $1.74 billion.
Indian mechanism
In India, the pricing of petrol has been de-regulated to a large extent while that of diesel, kerosene sold under public distribution system and domestic LPG is regulated. Because of this mechanism the projected revenue loss to be incurred by the oil retailers is close to Rs 1,71,000 crore in the current fiscal.
Despite the higher frequency of price revision during the NDA regime (1999-2004), the pinch on consumer pocket was lower, as the amount of every revision was minimal. In the UPA regime, the frequency of price hike has been less, but the quantum has been huge.
To minimise the impact of rise in international crude oil prices on consumers, in India the upstream players shoulder 33 per cent of oil retailers subsidy burden, while the Government shoulders one-third. The remaining third is absorbed by the retailers.