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fore, werecommend the price of diesel should also be market determined both at the refinery gate and atthe retail level.Petrol and diesel used in cars, including SUVs, are for final consumption. The higherexcise duty on petrol compared to diesel encourages use of diesel cars. While greater fuelefficiency of a diesel vehicle should not be penalized, a way needs to be found to collect thesame level of tax that petrol car users pay from those who use a diesel vehicle for passenger transport., should be levied on diesel car owners.A transparent and effective distribution system for PDS kerosene and domestic LPG canbe ensured through UID/Smartcards framework. Until it becomes operational, the followingmeasures need to be taken.

There is disparity in per capita allocation of PDS kerosene amongst States, as also decline in the percentage of households using kerosene. Besides, households have flexibility in absorbing increases in price of PDS kerosene to certain extent. Therefore, PDS kerosene allocation across states should be rationalized, which will bring down all-India allocation by atleast 20%. Further reduction in PDS kerosene allocation can be done on the basis of progress ofrural electrification, LPG and piped gas availability which is expected to reflect much largerreductions in next NSSO surveys.

The price of PDS kerosene needs to be increased by at least Rs.6/litre so that the share ofexpenditure on kerosene in the total consumption expenditure of rural households remains at thesame level as in 2002. Thereafter, price of PDS kerosene be raised every year in step with thegrowth in per capital agricultural GDP at nominal price.

Our analysis shows that prices of domestic LPG can be increased by at least Rs. 100 per cylinder. Thereafter, the price of domestic LPG should be periodically revised based on increasein paying capacity as reflected in the rising per capita income. The subsidy on domestic shouldbe discontinued for all others except the BPL households once an effective targeting system is inplace.For calculation of the under-recoveries incurred by the OMCs on sale of PDS keroseneand domestic LPG, the extant methodology based on import parity pricing may be continued solong as the country remains a net importer of kerosene and LPG.Following the above recommendations, the under-recoveries of OMCs due to petrol anddiesel will be nil.A mechanism for financing under-recoveries on PDS kerosene and domestic LPG has been provided in Table UR2 in paragraph 4.49. This mechanism involves periodic reduction in PDS kerosene allocation, increase in prices of PDS kerosene and domestic LPG from time to time, and mopping up a portion of the incremental revenue accruing to ONGC/OIL from production in those blocks, which were given by the Government, and providing cash subsidy from the Budget to meet theremaining gap. The OMCs marketing PDS kerosene and domestic LPG should be compensatedfully for their under-recoveries based on this mechanism.A market-determined pricing system for petrol and diesel can be sustained in the longrun by providing level playing field and promoting competition among all players, public andprivate, in the oil and gas sector. Adequate regulatory oversight is critical to ensure effective competition.

MOPNG may decide suitable amendments to the existing notifications and orders prescribing IPP and TPP so that any individual company will have full freedom to decide