Deregulation Of Oil Sector Likely In Four Years Deregula

The Union government plans to phase out state controls on the pricing of petroleum products and introduce a free market mechanism within four years, senior officials said yesterday.

Prime Minister Inder Kumar Gujrals cabinet was expected to take up next week the administered price mechanism (APM), which governs the domestic prices of petroleum products, they said. The United Front (UF) coalition on Wednesday deferred a decision on whether to raise the prices of some petroleum products to curtail burgeoning subsidies, but a senior official said the prices will soon have to be increased. The cabinet will meet next week to decide on dismantling the APM. A time-table for introducing the reforms will be announced thereafter, said a finance ministry official, who asked not to be identified.

 

State-run oil firms are facing a shortage of funds for investments.

The petroleum sector is going through a crisis. The cabinet is considering various options to tide over the crisis, petroleum minister Janeshwar Mishra said yesterday at a function to launch extra-low sulphur diesel.

Mishra said the option of deregulating the oil sector was being looked into, but he refused to divulge any details.

The finance ministry official told Reuters that the oil sector deregulation was part of a three-pronged strategy to overhaul the petroleum sector.

The first step is to pay off the 155 billion rupees ($4.34 billion) that the government owed to oil companies also known as the oil pool deficit at the end of 1996-97 (April-March), he said.

Simultaneously, the government will raise prices of some petroleum products to offset an increase in the deficit during 1997-98, he added.

The government has faced a huge deficit because it sells fuel used in mass transport and homes below cost, and is not able to recover the resulting deficit from surcharges on petrol and aviation fuel.

According to petroleum ministry estimates, subsidies on liquefied petroleum gas (LPG), diesel and kerosene are expected to add 92.07 billion rupees to the oil pool deficit in 1997-98 unless prices are increased.

To wipe out the previous 155-billion-rupee debt, the government plans to issue 10-year bonds to pay off the state-run oil companies. The finance ministry will issue promissory notes carrying 10.5 per cent interest rate to wipe out the deficit on the oil pool account, the petroleum ministry official said. Oil firms will receive part-payment of their outstandings immediately and the remainder will be liquidated gradually, the official said.

The procedures for issuing promissory notes to oil companies were being worked out by the finance ministry, he said, adding that prices of petroleum products would be raised to prevent a big increase in the oil pool deficit.

Some of the options that have been put forward are a 25 percent rise in the price of domestic LPG, a one-rupee per litre increase in the price of kerosene. and an end to a price subsidy for diesel, he said.

He said the cabinet would decide on the increases in prices of petroleum products.

The United Front coalition raised oil prices in July 1996, shortly after assuming power following general elections.