Oil Ministry will seek Cabinet nod for freeing diesel prices after retail rates achieve parity with global levels, and has proposed to cut subsidy payout by upstream firm like ONGC by half.

While the government had freed petrol price from its control in June 2010, it had started a phased deregulation of diesel rates in January last year with up to 50 paise a litre increase in rates every month.

Under-recovery, or the difference between retail selling price and its imported cost, has since come down to Rs 1.78 a litre and going by the international trend the pump rates will be at par with their cost by end of October.

“Once this happens, a proposal would be put to the Cabinet Committee on Political Affairs for deregulation of diesel prices as was done for petrol,” an official said.

Deregulation would empower state-owned oil firms to change rates in tandem with cost like they do for petrol.

But before that, the Ministry is approaching CCPA for changing under-recovery burden sharing by oil firms.

Currently, state fuel retailers sell diesel, domestic LPG and kerosene at government controlled rates which are way below their cost. The loss they thus make is made good by government through cash subsidy and upstream firms like Oil and Natural Gas Corp (ONGC) by way of discounts on crude oil.

The official said the under-recovery burden imposed unilaterally on upstream oil companies by the government has increased from Rs 32,000 crore (30 per cent of total under-recovery) in 2008-09 to Rs 67,021 crore (48 per cent of total under-recovery) in 2013-14.

Besides sharing subsidy, ONGC and Oil India Ltd (OIL) also pay Rs 4,500 per ton of cess on crude oil they produce. Recently, they have also been directed to pay 20 per cent royalty to state governments on pre-discounted price of crude oil and not post-discount rates is practice since 2008.