Easing unviable fuel subsidy

Diesel decontrol Has the govt opened another avenue for private players to re-enter oil marketing business

It was the beginning of the new year, when Finance Minister P Chidambaram said the government will examine “several dimensions” before taking a decision on diesel price deregulation. He sounded re-assuring that the UPA will, at least in the near future, spare the common man from the nightmare of frequent fuel price rise.

But barely a fortnight lapsed before a loud thunder struck diesel prices. This time it was not a one-time hike but a bitter pill to be swallowed in slow doses. The oil companies were given the direction to effect a small hike in diesel prices from time to time, a move that translates into partial deregulation of the highly sensitive commodity.

This came on the back of the highest one-time increase of Rs 5 per litre in diesel rates in September last year. Alongside the decision of raising diesel prices for retail buyers, there also came a significant step that diesel prices for bulk consumers like railways, defence, state transport undertakings and industries will be increased by at least Rs 10 per litre, implying an end of the subsidy regime for them.

The measure, as expected, set in a kind of euphoria in the stock market. The Sensex made gains as oil and gas stocks rallied. The rupee appreciated to a two-week high and the government averted an immediate threat of a rating downgrade by international agencies and brokerage firms.

But, the measure also evoked a lot of hue and cry from the public and political parties. The government and its policy-makers tried to pacify by saying that there was scarcely any choice but to raise diesel prices. The subsidy burden, the under-recoveries have gone up so much that if the government let the status quo on prices continue, the oil marketing companies and the upstream oil companies might seriously go under, they explained.

“One might find that they don’t have enough money, they are not able to buy the oil and bring the oil to the consumers. That would be a far more disruptive and politically damaging situation than having some small and gradual increase in diesel price. Not increasing diesel price is also inflationary,” expert on oil and gas and a former member of Planning Commission, Kirit Parekh, who recommended such a decontrol, was quoted saying soon after the decision.

India is the world’s fourth biggest oil importer and it is true that fuel subsidies are a drain on country’s finances. The step, especially the rise in prices for bulk buyers, will help the government struggling to bring down its deficit and a staggering Rs 96,000 crore oil subsidy bill.

But, the finance minister himself said, that he was not factoring in the impact of diesel price hike by oil companies while computing the oil subsidy bill for the current fiscal. This implies that there is no net gain for the government from the price hike if it maintains the subsidy budget.

The oil marketing companies maintain that their annualised gain is only Rs 5,000 crore from the 50-paise diesel price hike and linking bulk diesel sales to the market. Not only that, they also remained circumspect on the continuity of the move with India’s largest fuel retailer, Indian Oil Corporation saying it hoped it will be allowed to hike prices again.

Invite to pvt sector? Then who stands to gain from the decision, which has burnt such a large hole in consumers’ pocket? Has the government opened another avenue for the private players to turn around their fortunes after they were forced to shut shop seven-eight years ago, when the international prices rose and it became difficult for them to compete with state–owned companies?

Private players like Reliance Industries, Essar Oil and others, who once entered the business in 2003, have tasted the waters and bulk sale can be an immediate opportunity for them to re-enter. Another concern is that the bulk sale without a proper regulatory mechanism will lead to bulk purchasers sourcing fuel from retail outlets. This concern is far from being addressed yet.

“Difficult to say at this moment whether the private players will benefit immediately. They will try to gain foothold in the market so that they do not lose space when ultimately the government frees up diesel control. In the end, those with efficient management, infrastructure and delivery system will gain,” Deepak Mahurkar, Associate Director (Oil & Gas), PwC India, told Deccan Herald.

He also said that the government will ultimately stand to gain from the decision on bulk buyers as it will not have to pay any subsidy to them. Mahurkar said, the OMCs will over time stop being the losers too, along with the government.

The ultimate loser after the decision is the common man, who is already bearing the brunt of an overall price rise. If a minimum of 45-50 paise hike is effected every month in diesel prices, it will take close to two years for the OMCs to wipe out their current losses of Rs 9.25 per litre of diesel, given the international prices of crude does not go higher than what it is today. But, the same hike will offset the budget of a commoner significantly every month.

However, Petroleum Minister Veerappa Moily has wrapped up by saying that the government will wipe off oil subsidy entirely in the next two years. Consumers, be ready for a wider hole in your wallets!

Fuel prices and      Under-recoveries
Product-wise under-recovery of public sector OMCs     
Product    Unit    Under-
        recovery     
Diesel    (/Ltr)    9.16      
PDS Kerosene*    (/Ltr)    30.64      
Domestic LPG*    (/Cyl)    490.50

Under-recovery during April - Dec 2012     
Product    Under-Recovery
    (/Crore)     
Diesel    73,815      
PDS Kerosene    21,891      
Domestic LPG    29,148      
Total    124,854   

* OMCs are currently incurring daily under-recovery of  426 crore on the sale of diesel, PDS kerosene and domestic LPG.

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