BJP faces a tightrope walk on diesel pricing

Will the Narendra Modi-led BJP government free diesel prices or allow the subsidy to continue? This decision will have tremendous implications for the oil and auto sectors.

The previous UPA regime had kicked off the process of diesel price deregulation last year through monthly price hikes of 50 paise per litre. There was a two-month pause during the elections after which prices were hiked by ₹1.09/lt last week. As a result, the subsidy on diesel is now ₹5.70/lt.

It now remains to be seen if the BJP government will go ahead and complete the exercise of (diesel) deregulation. The UPA faced tremendous flak from the Opposition when it decided to go in for these monthly price hikes. With inflation still hitting household budgets, the BJP may not want to add fuel to the fire and will perhaps steer clear of touching diesel prices for the next couple of months.

However, this is a government that does not have to deal with the compulsions of coalition politics.

“It is very likely that the BJP may settle for a subsidy gap of ₹2/lt on diesel which will also encourage private players like Reliance to re-enter the fuel retail arena,” an oil industry official said.

RIL had, at one point, commissioned nearly 1,500 outlets across the country but could not sustain the business as it had to sell auto fuels at market prices.

These were naturally higher than what the public sector oil companies charged thanks to the subsidy element.

The Government eventually compensated IOC, BPCL and HPCL for losses incurred but private players did not have this cushion and had to sell at market-determined levels. Without a level playing field, the likes of RIL opted out of the business.

The PSU oil companies would, likewise, like to have the subsidy on diesel removed since it accounts for a large part of their retail losses.

Kerosene and cooking gas take up the balance but it is diesel that wreaks havoc with their finances since its applications go beyond transport to generator sets and construction equipment.

For auto companies, the price differential between petrol and diesel has reduced considerably to ₹15/lt from over ₹25/lt less than a couple of years ago. The monthly price hikes in diesel has led to a revival of demand for petrol cars which were relegated to the sidelines during the diesel wave.

Modi’s team of advisors would have to strike the balance between economics and politics in diesel pricing.

They would be only too aware that leaving the subsidy untouched would increase the losses of PSU oil companies and, consequently, the burden on the Government since it will have to square these up eventually.

The compensation (which includes cooking gas and kerosene) runs into over ₹50,000 crore annually with the balance met from the upstream oil companies led by ONGC.

The BJP would ideally like to keep the diesel subsidy at manageable levels which means a hike of ₹3/lt at best in the coming months.

It can manage a gap of ₹2/lt so long as global prices do not spin out of control as they did in 2008 when crude touched $150/barrel.

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