Last week’s 45 paise per litre increase in diesel prices bore out the government’s plan announced a month ago to nullify subsidy on the fuel over a two-year period, but bulk consumers are making a beeline to buy diesel in retail, threatening to mar the prospect of subsidy being reduced at the desired pace. An official from Indian Oil Corporation told FE on condition of anonymity that bulk sales have declined a sharp 30% since the prices were deregulated last month with an eye to reducing subsidy by over R14,000 crore annually.
IOC accounts for over 85% of bulk diesel sales, which is a fifth of the total market for the fuel in the country. There is roughly a 20% differential between bulk and retail prices after a nearly R10 per litre hike in bulk diesel prices last month.
The tendency among bulk consumers, especially state transport organisations, most of them in a financial mess, to skirt the price hike by meeting part of their demand by buying in retail has put the Centre’s plan in jeopardy. What compounds the problem for oil marketing companies are the chances of a rise in crude oil prices negating the benefit of recent measures. Oil marketing companies have already said that under-recoveries on diesel have only slightly increased over the past month, which saw crude prices going up by $4/litre or 3.6%.
Legal experts say nothing prevents states from allowing these organisations to buy diesel from retail outlets unless the central government clarifies (with support of law) that bulk consumers can’t buy from retail. The diesel subsidy this fiscal is estimated at around R1 lakh crore or over 60% of the total fuel subsidy.
When asked about the bulk consumers buying in retail, IOC chairman RS Butola said: “This is a very short period, let us not say that it is a trend. But we admit that there has been a significant drop in bulk diesel sales and corresponding increase in retail sales.”
In an attempt to contain the rising oil subsidy burden, the government last month scrapped subsidy on bulk diesel sold to the railways, state transport corporations, defence, power plants, other industrial users, etc. These entities were getting diesel at prices even lower than subsidised rates prevailing at retail outlets.India consumes around 64.5 million tonnes of diesel, out of which around 12 million tonnes is bulk sales.
The move to deregulate bulk diesel had led private oil refiners like Reliance and Essar to hope that they could exploit the opportunity. But with the drop in sales volumes and diversion towards retail sales, the private companies haven’t made any headway in the space.
“We have received enquiries from some bulk consumers and are exploring the options of serving them. As the majority of the bulk consumers are either government or government-controlled units, we can look for some volume customers in Gujarat. Most of the bulk consumers have annual contracts and we will participate once they come up for renewal,” an Essar Oil spokesperson said.
However, industry expert feels that if the diversion is not controlled with immediate effect, the slide in bulk diesel sales is likely to continue fuelling black marketing.