Differences in govt over diesel subsidy come to the fore

While Planning Commission deputy chairman Montek Singh Ahluwalia has favoured decontrol of the fuel, heavy industries minister Praful Patel wants subsidies to continue to meet the government's 'social obligation'

New Delhi: The differences within the government over pricing of diesel came to the fore today, with the Planning Commission favouring decontrol of the fuel while heavy industries minister Praful Patel wanted subsidies to continue to meet the government's 'social obligation', reports PTI.

Addressing the annual convention of the Society of Indian Automobile Manufacturers (SIAM) here today, Mr Ahluwalia said India needs to adjust its policy to the 'energy reality' as the world is entering an era of high energy costs.

"The present distortion of diesel and petrol prices should be corrected first," Mr Ahluwalia said.

While the government had in June last year freed petrol prices, diesel continues to be sold at a subsidised rates.

He also said subsidised fuel is not sustainable in the long-term and "we need to have rationalisation of energy security".

However, reacting to Mr Ahluwalia's remarks, Mr Patel said: "Diesel and petrol price disparity will stay. It will not go away as we have a social obligation..."

The minister also said policy planners and the government need to review their definition of diesel as a dirty fuel.

"There has been question over the environmental sustainability of diesel technology... But if we look at Europe or other developed world, the technology has developed so much and proved to be even better than the petrol technology," Mr Patel said.

Mr Patel also rejected the possibility of diesel being freed from government control in the near-term, stating, "At the moment, there is no move in the government to bring any change in the pricing."

While petrol in Delhi costs Rs63.70 a litre, diesel is priced at Rs41.29 per litre.

Over 40% of the Rs63.70 a litre price of petrol in Delhi is made up of taxes-a Rs0.69 customs duty, Rs14.78 in excise and Rs10.62 in state value-added tax (VAT).

However, in the case of diesel, the total taxes account for only Rs7.64 out the retail price of Rs33.65 in Delhi.

The taxes include Rs0.74 in customs duty, Rs2.06 in excise duty and Rs4.84 state VAT.

While petrol has been freed from government control and is priced at market rates, diesel continues to be sold at government-dictated rates.

Petrol prices have risen by 21% since they were freed from government control in June last year. The price of petrol in Delhi was Rs51.43 a litre when the government decontrolled the fuel on 26 June 2010. Today, it costs Rs63.70 a litre.


Oil ministry chides DGH for reopening RIL marketing margin issue

The ministry feels a Pandora's Box will be opened if the DGH move is approved, as public sector firms like GAIL India, too, have been charging a marketing margin, which is higher than what is being levied by Reliance, for several years now

New Delhi: The oil ministry has rebuked its technical arm, the Directorate General of Hydrocarbons (DGH), for reopening the issue of the marketing margin that Reliance Industries (RIL) charges on selling KG-D6 gas, but may seek the law ministry's opinion to ascertain if the firm can be asked to share those revenues with the government, reports PTI.

The ministry has conveyed its displeasure to the DGH at the highest-level over the reopening of a long-settled issue, sources privy to the development said.

It feels the DGH is wrongly interpreting the contract, which clearly states that the government is entitled to get a share of the price of gas at the delivery point. On the other hand, the marketing margin charged by the Mukesh Ambani-led firm is to be intended to cover the risk involved in carrying gas from that delivery point to customers' door-step.

The DGH recently asked RIL to add the $0.135 per million metric British thermal units (mmBtu) marketing margin to the KG-D6 gas price of $4.205 per mmBtu for the purpose of calculation of the government's profit take.

Sources said the ministry feels a Pandora's Box will be opened if the DGH move is approved, as public sector firms like GAIL India, too, have been charging a marketing margin, which is higher than what is being levied by Reliance, for several years now.

The same principle will have to be applied to gas produced from state-owned Oil and Natural Gas Corporation (ONGC), which is marketed by GAIL.

But to settle the issue once and for all, the ministry plans seek an opinion from the law ministry, they said.

The DGH demand also runs contrary to the stance the oil ministry took on the issue in Parliament last year.

The then oil minister Murli Deora had on 24 February 2010, told the Rajya Sabha that the marketing margin was a bilateral issue between the seller (Reliance) and the buyers.

The government approved the price for gas sales at the delivery point of the KG-D6 field as per the provisions of the Production Sharing Contract inked with RIL.

"The said price ($4.2 mmBtu) does not include any charge beyond the PSC delivery point. The marketing margin (levied by Reliance) is beyond the delivery point and arises as a result of the gas sale and purchase agreement signed between the seller and the buyer," Mr Deora had stated.

The PSC provides for sharing of revenues from the sale of gas between the government and the contractor at the said price at the delivery point. It does not envisage sharing of revenues earned by the contractor from marketing margins with the government, he had further said.

The marketing margin was in lieu of the risks and costs incurred by the contractor on marketing the gas. It is to cover risks like seller liabilities in case of non-supply, customers drawing less than their quota, non-payment of dues and settlement of disputes.

Sources said the DGH wanted the marketing margin to be added to the gas sale price of $4.20 per mmBtu so that profit-sharing between the contractor and the government is calculated at the total price of $4.335 per mmBtu charged by RIL from its customers.

At present, Reliance and the government split profits at the gas sales price of $4.20 per mmBtu after deducting the project cost.

Besides marketing risks, the $0.135 per mmBtu margin is charged by Reliance on account of its extensive efforts to identify customers, execute and manage gas sales and purchase agreements (GSPAs), as well as gas sales planning, daily gas sales operations, gas accounting and invoicing and collection, sources said.

The Anil Dhirubhai Ambani Group had in 2009 opposed the levy of a marketing margin by RIL, but agreed to pay it unconditionally after an oil ministry clarification.

Other gas marketers like state-run GAIL India also charge a marketing margin. GAIL charges a $0.18 per mmBtu margin on the sale of regasified LNG and about $0.12 per mmBtu for gas from fields like Panna/Mukta and Tapti and Ravva.


Consumer durables sales hit by high interest rates and inflation

The growth in consumer durable goods output has slowed, but the major manufacturers are doing reasonably well

Growth in consumer durable loans outstanding deployed by scheduled commercial banks fell sharply to 8.9% y-o-y (year-on-year) in July 2011 from 22% in the previous month, suggesting consumer sentiment is turning negative in India, according to Nomura Financial Advisory and Securities (India).

The brokerage said in a report released this week that high interest rates and elevated inflation are bearing down on discretionary consumer spending in the country. Consumer durable goods output growth already dropped to a meagre 1% y-o-y in June 2011. With consumer durable loans falling sharply, consumer durable goods production remained weak in July 2011, and it is expected that this trend will persist until inflation and interest rates come down.

The consumer durables loans market in India is quite sophisticated with the lenders having introduced concepts such as quick and easy loan, zero equated monthly instalment (EMI) charges, loan through credit card and loan over phone.  
This is how the eager customer has been able to afford the expensive consumer durables in his household for many years. This is not limited to the metropolitan cities. The growing rural demand is another factor that is helping home appliance makers.

Consumer Electronics and Appliance Manufacturers Association (CEAMA) expects that rural India will consume 20% of the consumer durable industry's production over the next five years. In spite of all these favourable factors pushing sales, the growth in demand is uniformly sluggish in the current season and a cause for concern for manufacturers.

The consumer durable goods section of the index of industrial production (IIP) grew by 3.3% in the June 2011 quarter compared with 19.7% in the corresponding period last year.
Consumer durables, which are popular and sought after by the Indian customer, include air conditioners, refrigerators, washing machines, sewing machines, electric fans, watches and clocks, microwave ovens, televisions, audio and video systems, personal computers, mobile phones, digital cameras, DVDs (digital video disk) and camcorders.

All these items require advanced manufacturing technology and the salesman has to educate the customer, when required. The purchase decision is done over time and is often planned with a loan being taken for the purchase. The loan has to be repaid over several months from the disposable surplus available in the monthly income. With inflation eating into the disposable surplus, growth in demand has been adversely affected.

According to the report, as the consumer durables market is dominated by multinationals for many products, the stock valuations and the stock market's evaluation are not important. Yet, Voltas, Hitachi Home & Life Solutions, Blue Star, Whirlpool of India, Havells, V-Guard Industries, Bajaj Electricals and TTK Prestige are doing reasonably well in the stock market. Price-earnings (PE) ratios of these companies are in the region of 9-16 times with the exception of TTK Prestige, which has a PE ratio of 31 times.

Government policy on controlling inflation, and in particular , the Reserve Bank of India's (RBI) setting of interest rates will be the key factors in seeing the market improving to higher growth levels. Till then, it is not just the consumer durables market, which is on a downswing, but also others who eye the consumer's monthly disposable surplus.  "Lots of activities like eating out, purchase of garments, travel and others could be curtailed," fears Rajesh Shukla, director of the National Council of Applied Economic Research (NCAER) centre for macro-consumer research.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)