Diesel subsidy in check but oil cos aren’t celebrating yet

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.

Reason 1, it requires Cabinet approval to formally indicate that diesel is out of the ambit of administered pricing mechanism. Only then will the trio of IOC, HPCL and BPCL have the freedom to change its price when the need arises.

Two, these companies are also aware that, unlike petrol, diesel has the potential to stoke inflation. As a result, complete freedom on its pricing is unlikely and there will be some element of Government intervention.

Diesel subsidy is now less than INR1.50 per litre and the monthly hike of 50 paise, in practice since January 2013, will ensure that it is completely eliminated by end-0ctober. The fall in global crude prices to $100/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 which is being done in the case of petrol. Till this formal approval from Cabinet is sought, these companies will only have the freedom to reduce prices keeping 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 per month.

“Even if Cabinet gives the go-ahead to 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 INR2/litre,” an oil sector official told Business Line .

According to him, such a move would be “perfectly understandable” given that diesel has myriad applications which go beyond the transport sector to other end user segments such as 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 INR2/ litre in diesel will further escalate power and food prices at a time when inflation is already hurting households across the country. And though such an increase seems unlikely now in the backdrop of falling global prices, it was barely five years ago when crude galloped away to $148/bbl and had the 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 INR100,000 crore this fiscal. This is a far better situation than 2013-14 when their losses were close to INR160,000 crore with diesel accounting for nearly 50 per cent of this figure.

COMMENT NOW