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Under-recoveries to remain high despite oil price hike

Last updated: 25 June, 2010
Bangalore/New Delhi, June 25, DHNS & Agencies:

Major policy reform: Industry welcomes Centre’s move

The government’s decision, on Friday, to abolish price control on petrol and raise prices of diesel, kerosene and cooking gas will see a whopping Rs 24,000 crore of savings for oil marketing companies in a full year.

 As a result, total under-recoveries from oil will comedown from Rs 77,000 crore in a year to Rs 53,000 crore, a drop of 31 per cent. 

This means that oil marketing companies together will save Rs 24,000 crore in a year and their earnings rise by that extent. Yet, the under-recoveries will continue at a disturbing level. As the price of petrol has been completely freed, it is expected that oil companies will now charge market price and fully recover Rs 7,500 crore of under-recovery. But in case of three other petroleum products, diesel, LPG and Kerosene, under-recovery will still be Rs 15,000 crore,  Rs 21,000 crore and Rs 17,000 crore, respectively. (see table).

Politically sensitive

In fact, in case of two politically sensitive items LPG and kerosene, which are consumed by common men, the price rise will save only 12 per cent and 15 per cent of the under-recoveries. This also means that the government will continue to subsidise oil products.
“If there would have been no hike in retail prices of diesel, under-recoveries for diesel alone would have been Rs 25,000 crore, which is a burden which the government and upstream oil companies cannot bear,” said Petroleum Secretary S Sundareshan.

As per Petroleum Ministry estimates, state-owned OMCs are currently selling petrol at a loss Rs 3.73 per litre, diesel at a loss of Rs 3.80 per litre, kerosene at Rs 18.82 a litre and domestic LPG at a discount of Rs 261.90 on every 14.2-kg cylinder. Market analysts say as a result of these upward revision in retail prices of four mass-consumed petroleum products, state-owned OMCs would stand to gain by 10 to 13 per cent.

ONGC Chairman & Managing Director R S Sharma said decontrolling of auto fuel prices as well as hike in prices of other petroleum products would bring relief for upstream as well as downstream industry.

New formula

Petroleum Minister Murli Deora there will also be new formula for subsidy sharing. “The existing formula was just ad hoc on quarter to quarter basis. We still remain clueless as to what are details of the new formula. But apparently one thing is obvious we do foresee a big relief for the sector at large,” ONGC chief said.

India Inc, on Friday, hailed the decision saying the government has demonstrated ability to take a difficult political decision. However, at the same time, the leading chambers of industry also talked about the inflationary pressures due to the decision to hike prices of petro products and free petrol from any administrative price control.

“CII welcomes the decision to deregulate fuel prices. While this will have some negative impact on the inflation in the short term ... the government has shown the ability to implement policy changes even if they are politically difficult,” CII said. According to Ficci, the government has taken a “very nuanced approach” in freeing up petrol prices. Despite voicing inflationary concerns, the chambers said the move would have a negative impact on the inflation which has reached the double digit. But it would help bring viability in the country’s oil economy.


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