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Administered pricing

An administered price is in general a price which is either set (fixed) by legal statute or by a standard procedure formulated as an official policy, instead of being determined directly by supply costs and market demand. Even if supply and demand conditions change, the administered price may therefore stay the same, or it may change in the opposite direction – if e. g. emand falls, the administered price is kept the same or raised, to subsidize the supplier and protect his income, or alternatively the price is kept constant to protect the consumer/purchaser. The use of dministered prices in market economies is often part of an economic policy of price controls, but in a planned economy or command economy the majority of prices are usually administered prices. In the United States In the U. S. administered prices are fixed by policy makers in order to determine, directly or indirectly, domestic market or producer prices.

All administered price schemes set a minimum guaranteed support price or target price for a commodity, which is maintained by associated policy measures such as quantitative restrictions on production and imports; taxes and tariffs on imports; export subsidies; and public tockholding. For example, administered prices under the 2002 farm bill (P. L. 107-171) include loan rates and/or target prices, and price support levels for sugar, and dairy products.

In Europe In Europe, an administered price is defined either as a price legally set by a government authority, a (heavily) subsidized price, or an oligopolistic price set by large corporations who command a large share of the market for their products and services. In the USSR, China and Cuba In socialist societies, an administered price is defined as a price set by the overnment planning authorities, which contrasts with a market price that can vary according to supply and demand. In a Soviet-type planned economy, most prices for important resources are officially fixed by the state, and adjusted according to state policy.

In Heterodox economics In heterodox economics, it is argued that it is a myth that most prices are determined “by the market. Instead, price levels reflect a mix of market-pricing and administered pricing, and large corporations operate their own internal price regime. Since direct and indirect taxes plus other government levies can amount to anywhere between 0% and 40% (or more) of final selling prices of goods and services, it is argued that a large component of final prices is not determined by the market. Thus, in any real economy, there is a “mix” of market prices, administered prices and combinations of the two.

APM dismantling In 1997, the Indian government took a strategic decision to deregulate the oil sector and dismantle the administered price mechanism (APM) existing in the Indian oil industry in three phases by the end of March 2002. For the last three years, the oil industry nad been undergoing a transtormation stage trom administered price echanism to market-determined price mechanism. During this period of transition, the government also aimed at clearing the oil pool deficit and reducing the subsidies on petro-products.

The oil pool account is now completely abolished and the deficit has been transferred to the general budget. The government has repaid most of the oil companies’ outstanding through the payment of oil bonds. With the dismantling of APM from April 2002, oil companies stand exposed to the vagaries in the international prices of crude oil and products. Hence, their profitability would now be governed by a different set of factors. In Budget 2002-03, the government increased the excise duty on LPG, kerosene and auto CNG from 8% to 16%. Excise duty on petrol was reduced from 90% to 32% and that on diesel from 20% to 16%.

Import duty on non-PDS kerosene has been reduced from 35% to 20% while that on PDS kerosene has been increased from 5% to 10%. Import duty on petrol and diesel has been retained at 20%. In a major step, the government reduced the subsidies on LPG and kerosene from 40% and 45% to 15% and 33% respectively. This led to an increase of LPG cylinder for domestic purpose by Rs 40 per cylinder and that of kerosene by Rs . 5 per litre. However, the increase in LPG cylinder was later rolled back to increase of Rs 20. Meanwhile, disinvestment in oil companies is in full swing.

The IBP disinvestment was a fine example. BPCL and HPCL are also lined up for divestment in fiscal 2002. Following the dismantling of APM, the government has allowed hedging in crude and petroleum products by corporates in order to mitigate risk from volatility of international oil prices. Post-APM dismantling, import of oil, mainly from the Gulf countries, could become a serious threat to domestic players what with lower cost of rude and lower transportation costs. The gross imports of crude oil and products for the year 2001-02 were estimated to be 93. 70 mmt.

Even as the refining companies are fully insulated from any adverse impact of a rise in global oil prices, it is the marketing companies that are currently being hit. Stand-alone refining companies sell products to marketing companies at import parity prices which are significantly higher than the retail prices at which PSU companies sell petrol and diesel. The real impact of APM will be felt only when the government sells its stake in BPCL and HPCL o the private sector and the private sector with a retail network come to the forefront for marketing of oil and gas.

The government is yet to frame guidelines private sector marketing. APM and its objectives Till 1939, petroleum product pricing was absolutely free with no controls whatsoever. Between 1939 and 1948, oil companies maintained pool accounts for major products without any kind of government interference. Then, finally in 1948, oil prices were regulated through a procedure called Valued Stock account. Under this procedure, the realization of oil companies was restricted to the import parity price of finished oods. Added to this were excise duties, local taxes, dealer margins and marketing margins of each of the refineries.

Any excess realization was then surrendered to the government. However, the Shantilal Shah Committee set up in 1969 did not favor the import parity price set as a benchmark for domestic pricing since by then India’s refining capacity had increased significantly. In 1976, the Oil Pricing Committee (OPC) nad recommended the discontinuance ot the import parity principle . This was because almost 90% of the total demand was met by indigenous production and no major shortfall was anticipated then. Mentioned below are some objectives

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