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/> percent custom duty on Motor Spirit and diesel and 5 percent custom duty on other petroleumproducts. The excise duty on domestic LPG and PDS kerosene has already been reduced to zero.The basic excise duty on Motor Spirit and Diesel (other than branded) has also been reduced toRs. 13.35 per litre on Motor Spirit and Rs. 3.60 per litre on diesel. The already

recommended additional excise duty on diesel-driven vehicle corresponding to the differentialtax in the form of higher excise on petrol consumed by average petrol-driven car, which will actas the equaliser. There is also the cascading impact of taxes such as entry tax/octroi imposed byState Governments on crude oil, petrol and diesel. Almost 20 percent of the price buildup ofpetroleum products is attributed to state taxes. This needs to be rationalised in order to achievefaster adaptation of domestic price of petrol and diesel to international crude price. TheEmpowered Committee of State Finance Ministers is already working with the CentralGovernment to prepare a roadmap for the introduction of the Goods and Services Tax (GST)with effect from 1st April, 2010.

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India’s imports of oil are increasing. Our import dependence has reached 80 per cent and is likely to keep growing. At the same time 2008 saw an unprecedented rise in oil price on theworld market. Oil price volatility has also increased. Though future oil prices are difficult topredict, they are generally expected to rise. Given our increasing dependence on imports,domestic prices of petroleum products have to reflect the international prices.

The Government has not permitted public sector oil marketing companies to pass global prices to domestic consumers. We have examined the impact of the formula-based prescriptivepricing of major petroleum products devised by the Government from time to time, particularly since 2002. The present system of price control on petrol and diesel in particular has resulted inmajor imbalances in the consumption pattern of petroleum products in the country, and has putundue stress on finances of the PSU oil marketing companies as well as of the Government. It has also led to withdrawal of private sector oil marketing companies from the market. This has affected competition in the domestic petroleum product market.Intervention through price control necessitates that someone bears the financial costs.The issue therefore is to assess the costs and incidence of the burden of alternative mechanismson different groups in the society. On whom the burden falls depends on the policy and theinstruments used.A viable long-term strategy for pricing major petroleum products is required. A viablepolicy has to be workable over a wide range of international oil prices and has to meet thevarious objectives of the government. It should limit the fiscal burden on government and keepthe domestic oil industry financially healthy and competitive.The petrol is largely an item of final consumption. An analysis of the trend of petrolconsumption by the automobile owners reveals that increase in prices of petrol can be borne bymotorized vehicle owners. Accordingly, we recommend that petrol prices should be marketdetermined both at the refinery gate and at the retail level.We have examined the implications of increase in retail price of diesel on various groupsof consumers and do not find any compelling reason to subsidize them. There