Under Recoveries -- >> Indian Economy !

• Most often we hear the word “Under Recovery” from the current government and hence this short update. 
• As the name suggests, under-recovery means recovering less than what could have been realized. 
• In India the oil marketing companies (OMCs) Indian Oil, HPCL, and BPCL, are selling us two auto fuels — petrol and diesel — and two cooking fuels — kerosene and liquefied petroleum gas (LPG). 
• These products are sold at less than notional market price (or trade parity price, as the government terms it) to make them affordable for the consumer. 
• Under-recoveries are often confused with losses. 

• While under-recoveries would be incurred if sale price is less than market rates (which includes margins), loss would be incurred if sale price is less than cost. 
• OMCs may be bearing a portion of the under-recovery burden, yet they can manage to post profits. 
• But if under-recoveries to be borne become too large, OMCs would slip into the red.

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  In short, the resulting gap between selling price and market price constitutes under-recoveries. 
  
  
  Why are Under-recoveries controversial ?
  
  
  • The quantum of under-recoveries has been a matter of debate for some time now. 
  • As indicated by several committees, the current trade parity pricing method of calculating under-recoveries, which assigns an 80 per cent weight to refined product imports and 20 per cent weight to exports may be overstating the actual burden.
  • This is because, although India imports most of its crude oil, it is an exporter of refined products such as petrol and diesel, thanks to the country's surplus refining capacity. 
  
  
  
  
  Result: The under-recovery calculation formula loads import costs such as freight, insurance, and customs duties on refined products, which may not have been incurred in the first place.
  
  
  
  
  
  
  
  • Also, under-recoveries are often confused with losses. 
  • While under-recoveries would be incurred if sale price is less than market rates (which includes margins), loss would be incurred if sale price is less than cost. In effect, OMCs may be bearing a portion of the under-recovery burden, yet manage to post profits , as seen in fiscal 2010. Of course, if under-recoveries to be borne becomes too large, OMCs would slip into the red.
  More transparency in the under-recovery calculations would help get a correct sense of the real burden.
  
  
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  India's GoI-PSU Oil Complex
  Who the players are, and their role in fuel subsidy
  
  
  'Upstream' Companies
  ·       These include companies such as ONGC and OIL, which supply crude to the oil marketing companies.
  ·       Importantly, they also bear a significant part of the fuel subsidy by giving discounts on the crude they sell to the refiners.
  ·       In 2011-12, for instance, such discounts accounted for about 40% of the total assistance to oil companies.
  
  
  Oil Marketing Companies
  ·       The 'refiners-cum-marketers' companies like IOC, BPCL and HPCL(called 'OMCs') buy crude from upstream companies, and refine it into diesel, petrol and other 'products'.
  ·       The 'refinery' arm of the OMC then sells it to the marketing arm of the OMC at the international benchmark price, which sell it to the end-customer.
  ·       By selling at controlled prices, the marketing arm of OMCs sustain a loss.
  
  
  Central Government
  ·       Mobilised about Rs 83,700 crore in taxes on various fuel products in 2011-12.
  ·       The total subsidy payout, on the other hand, to the oil companies to compensate them for under-recoveries, was about Rs 70,000 crore.
  ·       In 2011-12, it bore around half the total 'under-recoveries' of oil companies.
  
  
  
  
  Recent development !
  
  
  Under recoveries on diesel to end by mid-2015 : Planning Commission -
  
  
  
  
  (Note -- Figures are of 2011-12 ....for understanding the concepts ! )