The over-recovery dividend

Updated on: Oct 05, 2014

This is the right time to decontrol diesel and allow independent fuel retailing

Public sector oil marketing companies (OMC) are, for the first time, making money on diesel, pocketing an ‘over-recovery’ of ₹1.90 on every litre sold to consumers. Compare this to the situation only in September last year, when they were incurring an ‘under-recovery’ of ₹14.5 a litre, by realising a price below what it would have cost to import and sell the fuel here. This turnaround is largely a result of international prices; since last September, the average cost of crude imported by Indian refineries has dropped from $111.85 to $95.30 a barrel, even as the rupee has strengthened from 66 to 61.5 to a dollar. But important also has been the Centre’s decision in January 2013 “authorising” OMCs to raise retail diesel prices by 40 to 50 paise every month. This has resulted in prices for consumers in Delhi going up from ₹47.15 to ₹58.97 a litre.

The elimination of under-recoveries in diesel has, moreover, reduced its price differential vis-à-vis petrol to about ₹8.9 a litre, from over ₹20 prior to January 2013. Petrol prices have, indeed, fallen by roughly ₹4.5/litre since the start of this fiscal. Consumers have benefited here because petrol has already been decontrolled, with OMCs now fixing retail prices every fortnight based on import parity costs. The recent dip in global crude prices ought to have also made diesel cheaper from this month. But it has not happened as the fuel is yet to be decontrolled. Since diesel prices are still administered — the OMCs have the freedom only to increase and not decrease — and as the Election Commission’s Model Code of Conduct does not allow any ‘populism’ until Assembly polls in Maharashtra and Haryana are over, consumers have been denied the benefit of under-recoveries turning into over-recoveries. Ironically, decontrol would have also benefited the BJP-led government at the Centre. It could very well have taken the credit now for an automatic price reduction without requiring Election Commission approval!

All this only strengthens the case for decontrol. The Centre should grab the opportunity provided by softening crude prices to go for it immediately after the current elections. But merely allowing OMCs to make automatic price adjustments to import parity levels isn’t enough. Under-recovery, after all, does not always imply losses. Genuine decontrol can happen only with competition that will come with the entry of independent fuel retailers, for whom under-recoveries may not matter beyond a point. The Centre must dispense with the rule that now gives only OMCs or those with refining/exploration operations in India the right to market transportation fuels. This should be combined with de-canalisation of petrol and diesel imports. Anybody — not just Indian Oil Corporation or other state-owned OMCs — should be able to freely import fuel for sale here. Over time, we must extend decontrol to LPG and kerosene as well.

Published on March 09, 2018

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