Is daily change of petroleum prices justified ?
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This issue is about the pricing frequency of petrol/diesel which is causing major problem to individuals and transport operators.
Till 2002, the government was following the Administered Price Mechanism (APM), where by the government predetermined the prices at cost plus formula.
APM was however dismantled in 2002, and various practices for partial deregulation were adopted between 2002 and 2010.In 2010, petroleum prices were completely deregulated and freed to be determined based on market forces. A shift was made to the automatic price mechanism which would reflect on international market prices and foreign exchange rates. The power to set the final retail prices thus lay with the oil marketing firms.
However, since public sector companies controlled a major part of the market, the government’s influence on petrol prices continued in the form of political influence. A good example of this is when the petrol prices fail to change during the election period, even though the market prices of crude oil shift radically.
The Indian governments always continued their manipulation of prices through changes in duties and taxes. The state governments also have the authority to scale up the sales tax whenever retail prices come down.
From 16th June 2017, public sector OMCs such as IOCL, HPCL and BPCL have rolled out daily price change mechanism in all their retail outlets across the country, in line with the global practices. Thus, instead of fortnightly revision of prices, petrol prices change daily in tandem with international crude oil prices and foreign exchange rates.
Also, petrol pumps now follow a system of marginally differentiated pricing resulting in different prices at different outlets of the same OMC, based on location. For example, a petrol pump nearer to the supply station may have a lower price than the one farther away. Under the current regime, prices are revised at 6 AM every morning at petrol pumps.
Sir, a salaried person is given allowance for his two/four wheeler on monthly basis; which is based on a particular day’s prices. How will he manage if his costs keep on changing everyday. How will a middle class family plan a budget for petrol/diesel for their vehicle as their monthly salary does not provide any respite for such changes?
Sir, under this kind of fluid situation of petrol/diesel prices, how is a transport company expected to do business? Diesel forms 60% of the total cost of transportation by road. That means there is a great impact of any change in diesel prices on the transportation cost. Is it possible for him to change his prices everyday? Even during a trip of 5 day the prices may vary five times; how can one be sure of his profitability. A truck owner accepts a trip at one price on the basis of diesel prices of that day; however by the time he reaches his destination, he may be in a situation of having spent much more money on diesel. A transport company pays cash to driver for his fuel calculated on the basis of prevailing price, he may fall short of money.
Entire corporate sector, including PSUs, do business only on an annual contract. In such contracts, there are price variation clause but that does not take care of day to day changes. Most of the contracts allow changes in rates only after a substantial change like 5% or Rs. 4 per litre or similar takes place in the prices of diesel. That means a transporter has to always bleed of his profits because of such fluid situation of its cost.
Due to a very heavy competition in transport sector, there is a very thin margin in the transport services; a sudden surge in the cost is enough to convert the profitability into negative figure.
Dear Prime Minister ! You are the head of the country. How much to charge for diesel is in Government’s powers which it may exercise in national interest; but how it charges needs to be studied once again. You need to worry about this major service sector which is like the spine of the economy. In our opinion, you should restore the price variation to monthly basis so that all service providers and service consumers will have a reason to check the costs on one day in a month. Please bring about this change, Sir!
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