The government on Thursday allowed state-run oil marketers to raise diesel prices in “small quantities” over several months till their under-recoveries on sale of the fuel are eliminated, but raised the cap on subsidised LPG cylinders to 9. The diesel price “deregulation”, if implemented in earnest, can help reduce the oil subsidy burden to a large extent — OMCs’ under-recovery on diesel is R9.60/litre or an estimated R98,000 crore this fiscal — while hiking the number of subsidised LPG refills will result in additional under-recoveries of R9,300 crore.
The government has asked OMCs to hike diesel prices by 50 paise per litre monthly from Friday, Reuters reported, quoting an official source. This would mean that it would take about 20 months for the subsidy on the fuel to be nullified, given the current level of under-recoveries. The government also freed the pricing of bulk diesel, which would reduce the subsidy on the fuel by 18%.
“As far as diesel is concerned, oil marketing companies have been authorised to make price corrections from time to time,” oil minister Veerappa Moily said after a Cabinet Committee on Political Affairs meeting, adding, “It (price correction) can commence even from today.” The minister did not elaborate on the quantum of price hikes or the periodicity, but the Kelkar panel had recommended diesel price hike of R1-1.50/litre per month. The CCPA obviously sought to be politically savvy by combining the two decisions.
Oil companies were cautious on hailing the decision, given their disappointing experience with a similar “deregulation” of petrol in June 2010.
The government’s continued influence on pricing petrol led to a situation where the companies could not always raise prices in line with global oil prices till lately, while losses from the lag has not been compensated. “We have not received any communication from the ministry yet. We will go by the ministry’s directions,” said RK Singh, chairman, BPCL.
Unhappy with the lack of real freedom to hike petrol prices, Indian Oil Corporation chairman RS Butola had told FE in an interview in December that considering the difficulties in increasing petrol price and lack of compensation, the company would rather accept a rollback of the deregulation.
Under-recoveries in the current fiscal are estimated to be Rs 1.67 lakh crore. For domestic LPG and kerosene, under-recoveries stand at Rs 490.50/cylinder and Rs 30.64/litre respectively. OMCs are currently incurring daily under-recoveries of about Rs 384 crore on the sale of diesel, kerosene and domestic LPG. Cutting these subsidies (compensation for these losses) is crucial for the Centre’s fiscal consolidation road map and avoiding a downgrade of India’s sovereign credit rating to junk status.
The CCPA raised the annual ceiling on subsidised LPG cylinders to 9 (from previous 6) effective next fiscal and raised the entitlement for this year to 8. Subsidised LPG costs Rs 410.50 per 14.2-kg cylinder and any household requirement beyond the new limit of 9 cylinders will cost a near market price of Rs 895.50 per bottle. Finance minister P Chidambaram said oil companies have been allowed to make “small correction... I am looking at the same subsidy bill as was expected earlier.”
“Given the experience faced by OMCs on account of petrol and on LPG, we have a difficult situation in hand. We have not seen the notification. If the government has decontrolled diesel, there will be no question of subsidy either,” said Deloitte senior director oil and gas Kalpana Jain. The price of diesel was last revised on September 14 when it was hiked by a steep Rs 5.63 per litre. At present, diesel costs Rs 47.15 per litre in Delhi.
Even petroleum secretary GC Chaturvedi was not willing to term the decision deregulation. He said: “If we are to deregulate, then diesel price will have to be raised by Rs 9.60 per litre, which is not the case.”
Essar Oil MD and CEO LK Gupta said: “Private oil marketing companies have invested substantially in setting up retail outlets, but due to lack of level playing fields, these assets were underutilised. Once price parity is reached between retail and market prices, it will not only benefit consumers by providing them choice, but also help in demand management of diesel.”
As FE reported earlier, the petroleum ministry is also considering asking bulk consumers of diesel to buy at market rates. Currently, bulk consumers – power plants based on diesel, companies with captive power units, the railways and road transport corporations – buy the fuel at subsidised rates but at slightly lower rates than the retail consumer, thanks to a waiver of dealers’ commission and discounts offered by oil companies which compete to get the tenders. The subsidy bill on diesel would come down by around 18% if the ministry’s proposal is implemented.