Kirit Parikh Panel:"Current pricing system is highly distorting"

Feb 3: The much waited report of "The Expert Group on A Viable and Sustainable System of Pricing of Petroleum Products" (also known as the Kirit Parikh Panel Report) was submitted to petroleum ministry Murli Deora today (February 3, 2010). The Panel has said that the current pricing systems is faulty and has produced massive distortions in the market:

• Price control means setting prices. If it is done on a cost-plus basis, it creates incentives for gold plating and creative accounting. Also, price calculations involve rigid specifications of items to be considered and their costs. This discourages innovation.
• If prices are to be fixed by the government, that has to be based on some principle. Prices can be fixed based on pre-determined formula, which is derived from principles like import parity (IPP), trade parity (TPP), or export parity (EPP). This approach is also fraught with major deficiencies. The formula often involves elements of cost-plus. In an industry, which is continuously changing, a prescriptive and biased cost-plus pricing formula requires continuous monitoring and periodic adjustments in certain components of the formula.
• A competitive price discovery process empowers companies to follow their own judgments of market conditions and results in fair pricing of products. In the event of any company adopting unfair pricing methods, such activities can be curbed by the regulatory authorities set up by the government.
• Price control, subsidies and taxes can introduce distortions which may not be desirable. Apart from inefficient use, it also leads to erroneous choice of technique. For example, if diesel is cheap, it may encourage freight movement by trucks rather than by train. When the price difference between petrol and diesel is high, diesel driven vehicles may be preferred. If there is a large difference between the prices of diesel and kerosene, kerosene may be used to adulterate diesel.

Source: www.indianpetro.com

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