HOW PETROL PRICE IN INDIA DECIDE??

Diesel Pricing in India

• Let as assume that Diesel is being imported by IOC (Indian Oil Corporation) from a company in Saudi Arabia. The price at which this Diesel is purchased is called FOB Price i.e. Free On Board Price. In simple words this is the price IOC will pay the Saudi Arabian company to deliver Diesel at a nearby international port
  

• Now this Diesel 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

• Now the Diesel 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
  

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

• 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 Diesel paid by IOC at an Indian Port. Hence

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

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

• 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

• After a Refinery has processed crude oil into Petrol/ Diesel/ Kerosene etc, a term called RTP, i.e. Refinery Transfer Price comes into the picture. It is the price paid by OMCs (Oil Marketing Companies) to Refinery for the purchase of Diesel and in case of Diesel it is equal to TPP. In other words,  
  

• RTP = TPP

• This refined Diesel is transported by Rail/ Road to different retail outlets. For this Inland Freight is paid. OMCs spends money on marketing its products. When we add them we get TDP i.e. Total Desired Price. In other words
  

• TDP = RTP + Inland Freight + Marketing Cost

• But OMCs sell aforementioned Diesel to retail outlet at a price which is lessthan TDP. This price is called Depot Price.

• Now the Diesel has reached retail outlet. Here, Central Govt imposes Excise Duty, State Govt. imposes Value Added Tax (VAT) and a fixed profit margin per Litre of fuel is added.
  

• To answer your question about different prices in different cities, the state collects different taxes and transportation costs also change
• Hence, finally we get the retail price of Diesel
  

• Let's now understand above definitions in with some data - It is some old data that I found on the internet, so don't mind me. It is just for illustration.
  

FOB Price of Diesel - $ 124 / Barrel

Ocean Freight - $ 2 / Barrel

C&F Price  (1 + 2) - $ 126 / Barrel = Rs. 48 / Litre

(1 Barrel = 159 Litres and $1 = Rs 62)

Import Charges - Rs. 0.5 / Lt

Custom duty - Rs. 1.5 / Lt

IPP (3 + 4 + 5) - Rs. 50 / Lt

EPP - Rs. 48 / Lt

TPP - Rs. 49 / Lt

RTP - Rs. 49 / Lt

Inland Freight + Marketing Cost of OMC - Rs. 3 / Lt

Total Desired Price (8 + 10) - Rs. 52 / Lt

Subsidy by Central Govt. - Rs.10/Lt

Depot Price - Rs. 42 / Lt

Excise Duty + VAT + Dealer Commission - Rs. 10 / Lt

Retail Price (13 + 14) - Rs. 52 / Lt

Let's find out the answers of some Basic Questions-

What is Under Recovery?
Under Recovery is the difference between Total Desired Price & Depot price. Mathematically:

Under Recovery = TDP – Depot price

Are Under Recovery and Loss are similar terms?
OMCs are selling Diesel at Rs. 10/L loss. They get the same amount back, partly through Govt. subsidies and partly through discounts from oil suppliers (ONGC and OIL). Notionally, OMCs dont incur any losses but the delay in repayment of subsidies by Govt. means OMCs have to borrow money from the market and that entails a heavy Interest cost.

Central and State Govt. are taking a big amount as taxes but the subsidy bill is footed by Central Govt. only. Essentially, the subsidy bill is being paid by the taxes you are paying to the Central Govt.
Hence, Under-Recovery and Loss are not the same terms.

What is presently used in India EPP/ IPP/ TPP?
Presently for the pricing of diesel TPP is used.

Why Finance Ministry is insisting on using EPP?
From the above table it is clear that if EPP is used instead of TPP, then TDP will become 51 instead of 52. Hence Under-Recovery will reduce by Rs.1/L. So, Govt. will have to give lesser subsidy to OMCs. Therefore, Govt. deficit will come down.

Why OMCs and Petroleum Ministry are insisting on using TPP?
It is clear from the above answer that if EPP is used instead of TPP than OMCs will get less subsidy from Central Govt. But their expenditure will remain exactly same as earlier. Hence, their financial health will deteriorate.

Regards :

Vikram Singh Rana

Mobile :- +91-9983384690