Parity Pricing of petroleum products in India

Parity pricing of petroleum products in India refers to the mechanism by which the domestic prices of fuels such as petrol, diesel, kerosene, and liquefied petroleum gas (LPG) are aligned with international benchmark prices. This system aims to ensure that domestic fuel prices reflect the global market realities, thereby promoting economic efficiency and reducing fiscal burden on the government due to subsidies. Parity pricing can take the form of Import Parity Price (IPP), Export Parity Price (EPP), or a combination known as Trade Parity Price (TPP).

Background and Evolution of Parity Pricing

The pricing of petroleum products in India has evolved from a highly regulated regime to a partially deregulated framework over several decades. Until the early 2000s, India followed an Administered Pricing Mechanism (APM), introduced in 1976, under which the government fixed petroleum prices to ensure stability and affordability. The APM covered all major petroleum products, with subsidies provided to oil marketing companies (OMCs) to compensate for losses arising from controlled prices.
With the liberalisation of the Indian economy in the 1990s, the government initiated a gradual move towards market-linked pricing. In April 2002, the APM was dismantled for major fuels like petrol and diesel, and a new system based on import parity pricing was introduced. However, for politically sensitive fuels such as kerosene and domestic LPG, subsidies continued under the aegis of social welfare policies.

Concept of Parity Pricing

Parity pricing is based on the principle that petroleum product prices in India should be equivalent to what it would cost to import or export the same product under prevailing international conditions. It considers various cost elements, including the international crude price, ocean freight, insurance, customs duty, port handling charges, and inland transportation costs.
1. Import Parity Price (IPP):IPP represents the price that would have been paid if the product had been imported into the country. It includes the Free on Board (FOB) price of the product in the international market plus costs such as freight, insurance, customs duty, and port charges. This system was originally designed to ensure that Indian refineries remained competitive with global benchmarks.
2. Export Parity Price (EPP):EPP reflects the price that could be earned if the product were exported from India. It generally includes the FOB export price minus export-related costs. The EPP is particularly relevant when India becomes a net exporter of petroleum products.
3. Trade Parity Price (TPP):In 2006, the Indian government introduced the TPP mechanism for petrol and diesel. The TPP is a weighted average of IPP (80%) and EPP (20%), reflecting the proportion of domestic fuel consumption met through imports versus exports. The TPP ensures a balance between the interests of consumers, refiners, and marketers, and reflects India’s position as both an importer and exporter of refined products.

Determination and Components of Parity Pricing

The parity price of a petroleum product is computed by considering several cost and tax elements. The base price is determined by taking the average international price of the corresponding product over a specific period, usually the previous fortnight. This price is converted into Indian rupees using the prevailing exchange rate.
The major components include:

• FOB price: The benchmark international price at which crude or product is traded.
• Freight and insurance: Costs incurred to bring the product to Indian ports.
• Customs and import duties: Levies applied on imported fuels.
• Port and pipeline charges: Handling and transportation costs to reach refineries or depots.
• Marketing costs and margins: Expenses of oil marketing companies and dealer commissions.
• Excise duty and VAT: Taxes imposed by the central and state governments, respectively.

The cumulative effect of these elements determines the final retail selling price of petrol and diesel at the pump.

Deregulation and Pricing Reforms

The transition to market-based pricing has been gradual. Petrol was fully deregulated in June 2010, and diesel followed in October 2014, enabling prices to be adjusted in line with global crude price movements. This shift reduced the government’s subsidy burden and encouraged competition among OMCs such as Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Limited (HPCL).
However, products like kerosene and domestic LPG continue to be subsidised under the Direct Benefit Transfer (DBT) scheme to support low-income households. Despite deregulation, the government retains the ability to influence prices indirectly through excise duties, public pressure, or strategic intervention during periods of extreme price volatility.

Implications and Impact

Parity pricing has several macroeconomic and fiscal implications for India:

• Market Efficiency: Aligning domestic fuel prices with international benchmarks encourages efficient resource allocation and reduces distortions in the energy market.
• Revenue Generation: Taxes on petroleum products constitute a major source of government revenue. During times of falling global crude prices, higher excise duties help maintain fiscal stability.
• Inflation Control: Volatile fuel prices directly affect inflation through transportation and manufacturing costs. Therefore, governments often manage price fluctuations carefully to prevent inflationary pressures.
• Investment and Competition: Transparent and market-linked pricing encourages private sector participation and investment in refining and retail distribution.
• Subsidy Rationalisation: Parity pricing reduces dependence on government subsidies, freeing resources for other developmental priorities.

Criticism and Challenges

Despite its economic rationale, the parity pricing mechanism has faced criticism on several fronts:

• Consumer Burden: Frequent price revisions linked to volatile international markets can burden consumers, especially during global price spikes.
• Tax Structure Complexity: High levels of excise and VAT taxes often mean that domestic prices do not fall proportionately when international prices decline.
• Exchange Rate Sensitivity: Depreciation of the Indian rupee can offset the benefits of declining crude prices, leading to inconsistent domestic price trends.
• Transparency Issues: The calculation of parity prices and the role of government taxes are often not clearly communicated to the public.
• Social Equity Concerns: Uniform parity pricing may not account for income disparities across regions, leading to affordability challenges for vulnerable groups.

Significance for India’s Energy Policy

Parity pricing plays a critical role in India’s broader energy and fiscal policy framework. It strengthens India’s integration with global energy markets and supports the country’s long-term goal of energy security through economic rationalisation. Moreover, it provides a basis for promoting alternative energy sources such as electric vehicles and biofuels by reflecting the true cost of fossil fuel consumption.