The APM will be completely phased out by March 2002. However, it seems that the government is not prepared for it. Is there a way out without harming the consumer's interest?

After a long period of apprehension and anticipation, the administered price mechanism (APM) is finally going to be dismantled, come April 1, 2002. This would mean opening up the hitherto protected sector to participation from private sector players. Simply put, in post-APM regime, petro-products would be market determined and private players will be allowed to market these products directly. This is expected to bring down the subsidies in petro-products from a whopping 41 percent to a minimum of 15 percent.

Reduction in subsidies would mean increase in kerosene and LPG prices by a maximum of Rs. 1.20 and Rs. 100, respectively. If, at all, any subsidies are still provided on kerosene and LPG that has to be met from the general budget rather than passing on the burden on the oil pool deficit. Under the present regime, households pay more for petrol and diesel whereas kerosene and LPG are subsidized. Certainly higher prices of kerosene and LPG are going to exert a lot of pressure on the common household; needless to say this is bound to have strong socio-political implications.

Given the nature of the issue and its implications thereof, a brief discussion of the genesis of the administered price mechanism and the steps taken so far in the direction of dismantling it could bring some clarity on this raging issue. APM that started in the early 1970s, is a price mechanism that enables the government to set prices and rates of returns for petro-products based on the "cost-plus" mechanism. These prices were not guided by the actual import prices. At all refinery locations prices of petro-products were equalized through common accounts and diesel, kerosene and LPG were cross-subsidized by other fuels. The oil pool account that maintained cash inflows and outflows from the petro-products, naturally suffered from a deficit most of the time. Products like petrol and air turbine fuel (ATF) used to provide some additional revenue, which was channelized to meet the subsidy bill of the oil pool account. Though in the eighties the oil pool account generated accumulated profits of more than Rs. 4,000 crore on a cumulative basis, conditions started deteriorating at a fast rate as international oil prices moved up. Eventually, the domestic rates failed to keep pace with the international prices. Since then the oil pool account has been incurring losses and has now touched an accumulated deficit of Rs. 18,000 crore if the crude oil prices stays at $26 a barrel.

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