Get ready for a higher fuel price. Troubled with the impact of consistent rupee depreciation against dollar on the financial health of the public sector oil marketing companies, the Petroleum & Natural Gas Minister, M Veerappa Moily, has made a case for an appropriate increase in price of diesel, kerosene sold under public distribution system, and domestic LPG.

Buzz is that diesel may get costlier by Rs 3-5 a litre, kerosene by Rs 2 a litre and LPG by Rs 50 a cylinder. Though the Minister has not given any numbers.

The Minister has written to the Prime Minister Manmohan Singh, and the Finance Minister P Chidambram, urging them to take corrective steps to check the deteriorating financial health of the oil marketing companies (OMCs) due to mounting under-recoveries (loss incurred by companies) for selling these products at a controlled price.

"…consistent rupee depreciation has a severe impact on the under-recovery of the OMCs and consequently on their financial health. If the present position persists, the total under-recovery would reach to a level of Rs 1,80,000 crore in the current financial year as compared to Rs 1,61,000 crore during the financial year 2012-13," Moily said in letters separately written to the Prime Minister and Finance Minister.

The Cabinet Committee on Political Affairs on January 17 decided to increase the diesel price in the range of 40 paise to 50 paise a litre per month (excluding VAT), sell diesel to bulk consumers at market price, and cap on subsidised domestic LPG cylinders to 9 annually.

In spite of seven increases in diesel price since January 18, 2013 totally Rs 4.25 a litre, the current under-recovery is Rs 10.22 a litre. At present, the companies incur a monthly under-recovery Rs 6,204 crore on the sale of diesel. At the current level it will take around 20 months to eliminate this loss provided there is no further increase in the international price of diesel and rupee-dollar exchange rate, the Minister said.

The monthly loss on PDS kerosene is Rs 2,398 crore, and domestic LPG Rs 3,058 crore.

However, with the significant depreciation of rupee against dollar since April 2013, the under-recovery burden is likely to become much higher, the Minister said adding that it is estimated that every rupee depreciation against dollar increases under-recovery on sale of diesel, PDS kerosene, and domestic LPG by about Rs 7,900 crore annually.

"If we consider the average price of India crude basket at $ 110 a barrel and the average exchange rate at $ 66 for the balance financial year, the under recovery of OMCs will increase to an unsustainable level of Rs 1,68,000 crore. If the price of international crude oil increase to $ 115 a barrel the under-recovery will reach to around 1,81,000 crore," the Minister said.

The upstream assistance – ONGC, Oil India – and GAIL (India) is expected at Rs 70,500 crore, The remaining under-recovery of Rs 97,500 crore can be met from either the Budgetary support from Government or appropriate increase in fuel price, the Minister said.

As Budgetary support could lead higher fiscal deficit, the only option left is fuel price hike, those tracking the sector say.

(This article was published on August 31, 2013)
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