The subsidy on diesel could be wiped out over the next couple of months, but public sector oil companies are not uncorking the champagne yet.

For one, it requires Cabinet approval to formally indicate that diesel is out of the administered pricing mechanism ambit. Only then will the trio of IOC, HPCL and BPCL have the freedom to change prices when the need arises. And, two, these companies are also aware that, unlike petrol, diesel has the potential to stoke inflation.

No full freedom yet As a result, complete freedom on pricing is unlikely as there will be some element of Government intervention. Diesel subsidy is now less than ₹1.50 per litre and the monthly hike of 50 paise, in practice since January 2013, will ensure that it is completely eliminated by end-October. The fall in global crude prices to $100 a barrel has also helped the cause.

It is now up to the Government to go ahead with the process of diesel deregulation and let the oil marketing trio decide price changes, as is being done in the case of petrol. Till this formal approval from the Cabinet is sought, these companies will only have the freedom to reduce prices in line with global trends. However, they cannot make any adjustments, should there be a spurt in prices instead, and can only make do with the mandated 50 paise a month.

“Even if the Cabinet gives the go-ahead on diesel (price) deregulation, companies will not be allowed to implement any sharp price increases, even if the situation warrants. At best, this could be capped at ₹2 a litre,” an oil sector official told Business Line .

Cascading effect According to him, such a move would be “perfectly understandable” given that diesel has a myriad applications that go beyond transport to farm and construction equipment as well as generator sets.

“It is a mass product, unlike petrol, which is still perceived as the affluent man’s fuel,” the official added. A hike of over ₹2 a litre in diesel will further escalate power and food prices at a time when inflation is already hurting households. And though such an increase seems unlikely now in the backdrop of falling global prices, it was barely five years ago that crude galloped away to $148 a barrel and had oil companies gasping for survival.

“We may be celebrating today, but it only takes a fresh bout of tension in the Middle-East to send crude prices skyrocketing again,” the official said.

For the moment, though, there is some cause for cheer with diesel prices in check and oil companies looking at a fuel subsidy bill of less than ₹100,000 crore this fiscal. This is a far better situation than in 2013-14, when their losses were close to ₹160,000 crore, with diesel accounting for nearly 50 per cent of this figure.

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