The Ministry of Petroleum and Natural Gas has stopped short of proposing complete deregulation of diesel prices.

In an inter-ministerial note on the pricing mechanism for petroleum products, the Ministry has endorsed the existing system of raising diesel prices by up to 50 paise a litre every month.

Once retailers bring their rates in sync with market prices, a fresh proposal will be put up for the Cabinet Committee on Political Affairs to consider decontrol, the note said.

Petrol prices have already been deregulated.

This reluctance, according to industry observers, is a clear indication that the Government does not want to take any politically sensitive decision. A rise in retail diesel prices has direct implications for customers — the common man, transporters, power, agriculture; all are key vote banks.

Although, bulk diesel rates are linked to market prices, under the dual pricing system most transporters ended up buying from retail outlets. In fact, the note also seeks post-facto approval for bulk supply of diesel to farmer cooperative societies at the price applicable for retail consumers.

Another industry insider said that given the BJP’s lukewarm performance in the recent Bihar Assembly bypolls, the Government may become more cautious about complete decontrol.

The current under-recovery on diesel for the three oil marketing companies — Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation — stands at ₹1.78 a litre. Under-recovery is the loss incurred by companies for selling diesel, domestic LPG and kerosene under the public distribution system.

Subsidy sharing

The Government offsets the losses incurred by the PSU oil retailers for selling auto and cooking fuel at controlled prices through subsidies. While the major chunk of this burden is shouldered by public sector oil exploration and production companies ONGC and Oil India along with GAIL (India), a part is absorbed by the Government itself. A small portion is shouldered by consumers.

The Ministry has proposed that under-recovery for the financial year 2014-15 onwards should be shared equally by the Government and upstream companies (ONGC, Oil India, GAIL).

Addressing the longstanding concerns of upstream companies, the Ministry has proposed that the Oil Industry Development Cess paid by ONGC and OIL on crude production from nomination fields — areas given to them prior to auction rounds — be considered as part of their subsidy contribution.

The note said that 50 per cent of the total subsidy burden of ONGC and OIL will be the cess paid. According to the note, the gross under-recovery for the current fiscal year is estimated at ₹98,622 crore. The total share of upstream companies will be ₹49,311 crore, but after deducting the Oil Industry Development Cess of ₹10,111 crore, it will come to ₹39,200 crore. The remaining ₹59,422 crore will be met by the Government.

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