Diesel Pricing in India

·        I usually come across many terms in news like Subsidy, Under-Recovery, and more recently EPP (Export Parity Price) & IPP (Import Parity Price). 

·        Let’s understand how the retail price of Diesel is calculated in India?

Ø Let crude is imported by IOC (Indian Oil Corporation) from a company of Saudi Arab. The price at which this crude is purchased is called FOB Price i.e. free On Board Price. In simple words this is the price at which Saudi Arab Company will bring the crude from its Well and deliver it at a nearby international port.

Ø Now this crude will be transported on ships from aforementioned port to some Indian Port. For this a charge will be paid to transporter. This charge is called Ocean Freight. When Ocean Freight is added to FOB Price we get resultant as C & F Price i.e. Cost & Freight Price. Thus

C & F Price = FOB Price + Ocean Freight

Ø Now the crude has reached an Indian Port. Here a term called Import Charges comes into picture. It consists of three charges -

'  Insurance charges i.e. premium paid to an insurance company for the insurance cover it provided to the crude

'  Port Dues i.e. fees paid in lieu of using the facilities of a port

'  Ocean Losses i.e. to compensate for the oil lost during transportation

Ø On the imported crude Govt of India imposes a tax called Custom Duty. It is 2.5 % of theC & F Price i.e. if IOC purchases crude whose C & F Price is Rs. 100 per Litre then Custom Duty will be Rs 2.5 per Litre.

Ø When we add C & F Price , Import Charges and Custom Duty we get a very important term called IPP i.e. Import Parity Price. In very simple words IPP is the price of crude paid by IOC at an Indian Port. Hence

IPP = C & F Price + Import Charges + Custom Duty

Ø One more term becomes worth mentioning here which is EPP i.e. Export Parity Price. It is basically a hypothetical term. It is equal to the FOB price realised by IOC if it WOULD HAVE exported its Diesel to international market.

Ø In India the weighted average of IPP and EPP is used. Thus we get another popular term called TPP i.e. Trade Parity Price. It is calculated as follows-

TPP = 0.8 X IPP + 0.2 X EPP

Ø Now the imported crude moves towards Refinery and processed into Petrol/Diesel/kerosene etc. Here a term called RTP i.e. Refinery Transfer Price comes into scene. It is the price paid by OMC (Oil Marketing Company) to Refinery for the purchase of Diesel and in case of diesel it is equal to TPP. In other words

RTP = TPP

Ø This refined Diesel is transported by Rail / Road to different retail outlets. For this Inland Freight is paid. OMC spend a lot of money on marketing its product. When we add them we get TDP i.e. Total Desired Price. In other words

TDP = RTP + Inland Freight + Marketing Cost

Ø But OMC sells aforementioned Diesel to retail outlet at a price which is less than TDP. This price is called Depot Price.

Ø Now the Diesel has reached retail outlet. Here Central Govt imposes Excise Duty, State Govt imposes Value Added Tax (VAT) and Retail Outlet / Petrol pump add its margin.

Ø Hence finally we get the retail price of Diesel.

·        Lets now understand above definitions in the light of latest available data -

S.No	Factor	Value
1	FOB Price	$ 124 / Barrel
2	Ocean Freight	$ 2 / Barrel
3	C & F Price  (1 + 2)	$ 126 / Barrel  = Rs. 48 / Litre (1 Barrel = 159 Litres and $1 = Rs 62)
4	Import Charges	Rs. 0.5 / Lt
5	Custom duty	Rs. 1.5 / Lt
6	IPP (3 + 4 + 5)	Rs. 50 / Lt
7	EPP	Rs. 48 / Lt
8	TPP	Rs. 49 / Lt
9	RTP	Rs. 49 / Lt
10	Inland Freight + Marketing Cost of OMC	Rs. 3 / Lt
11	Total Desired Price (8 + 10)	Rs. 52 / Lt
12	Depot Price	Rs. 42 / Lt
13	Excise Duty + VAT + Dealer Commission	Rs. 10 / Lt
14	Retail Price (13 + 14)	Rs. 52 / Lt

·        Let’s find out the answers of some Basic Questions-

Ø What is Under Recovery?

Under Recovery is the difference between Total Desired Price & Depot price. Mathematically –

Under Recovery = TDP – Depot price

Ø Are Under Recovery and Loss are similar terms?

OMC’s are selling Diesel at Rs.10 /Lt Loss. But they are getting the same amount from Govt as Subsidy. So OMC’s are not incurring any loss. The Govt too is taking almost Rs.10 /Lt as tax on Diesel so they too are not incurring any loss.

Hence Under- Recovery and Loss are not the same terms.

Ø What is presently used in India EPP /IPP /TPP?

Presently for the pricing of diesel TPP is used.

Ø Why Finance Ministry is insisting on using EPP?

From the above table it is crystal clear that if EPP is used instead of TPP then TDP will become 51 instead of 52. Hence Under-Recovery will become Rs.1/ Lt lesser. So Govt will have to give lesser subsidy to OMC’s. But Govt will continue to get same amount as Taxes. Therefore Govt Deficit will come down.

Ø Why OMC’s and Petroleum Ministry are insisting on using TPP?

It is clear from the above answer that if EPP is used instead of TPP than OMC’s will get lesser subsidy from Govt. But their expenditure will remain exactly same as earlier. Hence their financial health will deteriorate.

written by - KAVI DEEPENDRA