7.3.1. Pricing of Petroleum Products

Until 2002, the government set the price of petroleum products through the Administered Pricing Mechanism (APM), which followed the principle of allowing a predetermined return (rather than market-based prices) on investments in the oil sector. After 2002, only certain products (kerosene and LPG) remained regulated, while oil companies could set their own prices for other fuels. However, many oil marketing companies still set retail prices at below- market levels so they could claim under-recoveries (the difference between a global market price and the local price) from the Ministry of Finance for certain products at favorable rates.

The government began domestic fuel price reform and after freeing of prices of petrol in FY11 and diesel in FY15, the Centre picked up the entire subsidy on domestic cooking gas from FY16. Further, the pricing of petrol and diesel in domestic market is linked with international price of petrol and diesel and not with the price of crude oil.

The government has also taken steps to gradually reduce subsidy on kerosene, continuing the series of market-oriented reforms that have galvanised the petroleum sector and attracted big- ticket investment. The Union government has asked state oil companies to keep raising prices of subsidised kerosene by 25 paise every fortnight until the subsidy is eliminated, or until further orders. The fuel is still heavily subsidised but demand for kerosene is falling sharply because villages are being rapidly electrified and the government has supplied cooking gas connections to crores of poor people in the past three years. Delhi and Chandigarh are already kerosene- free cities.

The government has been aggressively discouraging use of subsidised kerosene, mainly used by the rural poor for lighting and cooking, as it is a polluting fuel and sometimes ends up as an adulterant at petrol pumps. Subsidised kerosene is also misused to adulterate diesel. By cutting

subsidies, the government is bringing the commodity closer to the market price, which will eventually stop diversion for adulteration as well as encourage consumers to switch to the cleaner liquefied petroleum gas (LPG).

The price of cooking gas is also being increased gradually to eventually align it with market rates.

Other reforms undertaken by the government include the end of the controversial profit- sharing system, which obliges the oil ministry to closely monitor oilfield expenditure, leading to bitter disputes with private investors. The new exploration policy also allows market price for gas and gives companies the freedom to carve out exploration blocks themselves.