OMCs suffer biggest loss of Rs 40,500 cr in Q1

With the oil marketing companies (OMCs) posting a biggest ever loss in the first quarter of this fiscal at Rs 40,500 crore — on selling regulated fuels below their market prices (under-recoveries) reaching alarming levels — an urgent corrective action such as hiking the price of diesel is crucial, says Crisil Research.

In its latest report, Crisil points out that losses by OMCs increased sharply primarily because of the absence of any government compensation towards under-recoveries incurred in the quarter. Besides, increase in interest costs and inventory and forex losses aggravated the situation.

Diesel prices were last revised in June 2011 along with kerosene and LPG prices. Non-revision of administered prices of these fuels, since then, has severely impacted the liquidity and profitability of OMCs and massively inflated the government’s subsidy burden.

As such, OMCs currently incurr a record-high losses of Rs 14 per litre on diesel, Rs 29 per litre on kerosene and Rs 250 per cylinder on LPG which is largely due to inadequate revision of domestic prices, inspite of a sharp rise in international prices. So, under-recoveries, which had already increased by 77 per cent in 2011-12 to Rs 1,385 billion (up from Rs 782 billion in 2010-11), will continue to be higher in 2012-13 also.

The under-recoveries in the first quarter of 2012-13 itself have increased to Rs 478 billion, which is the highest ever quarterly figure.

Crisil avers that the rise in under-recoveries could also be attributed to increased consumption of regulated fuels (like diesel) by private car owners due to significant difference in prices as compared to other alternate fuels like petrol.

Given the crippling under-recoveries of OMCs and fast deteriorating fiscal situation, a hike in prices of regulated fuels, especially diesel, which accounts for ~60 per cent of under-recoveries, is essential and inevitable, says Crisil.

Losses arising from under-recoveries are typically shared by the government, upstream oil companies(ONGC, OIL India and GAIL) and OMCs (IOCL, BPCL and HPCL) according to a proportion determined by the government at the end of every fiscal year.

Given the seriousness of the problem, Crisil moots that it is crucial that prices of regulated fuels be raised by at least 10-15 per cent immediately and gradually be linked to international prices. The alignment of regulated fuel prices with international prices may affect domestic fuel inflation in the short term, but in the long-term, the move would help ease the government’s subsidy burden and reduce wasteful consumption of regulated fuels like diesel.