Pop goes the diesel

After years of dilly-dallying, the government surprised on Thursday afternoon by daring to partially bell the cat and free the sale price of diesel, but gave some of the gains away by cutting the price of petrol by 25paise and increasing the subsidised cylinder limit for households by three to nine a year.

Those using more cooking gas than that will have to pay non-subsidised market rates.
Diesel prices have been hiked by 45paise or about 1% for normal buyers, while bulk buyers such as telecom companies, which are the biggest consumers (using it to power their cell signal sites), will have to pay Rs11-13 or 25% more per litre (ending up paying almost Rs60 per litre in some markets).

What to watch out for is how frequently oil companies will hike diesel prices now. The talk is that it will be once a month. That’s the best way to go about it since it will hurt less and will prepare people to bear the additional burden, said analysts.

Oil companies lose Rs9.63 every time they sell a litre of diesel.

Diesel accounts for 59% of the Rs1.6-lakh crore losses expected to be incurred this fiscal through fuel subsidies — Rs10.81 per litre over and above the current rate of Rs47.15 in Delhi. The government is expected to save about Rs9,000 crore of raise in price for retail buyers.

The cabinet committee on economic affairs also rejected the finance ministry’s proposal to increase the price of subsidised LPG cylinder by Rs100 before raising the quota. The rejection will cost the government Rs9,300 crore next fiscal in terms of subsidy.
Such a rise will be enough to cover for the LPG subsidy difference, said oil marketing company (OMC) sources. A rupee’s hike in diesel price reduces the government’s deficit by Rs8,000 crore, according to analyst estimates.

The price of kerosene was left untouched.

Thursday’s key decisions immediately evoked a thumbs-up from most quarters, with experts saying it is a step forward, given the tight economic situation.

“This is a brilliant balancing act between politics and economics. This is one step backwards and one step forward,” said NR Bhanumurthy, professor at the National Institute of Public Finance and Policy.

But not everyone was chuffed. Kirit Parekh, who recommended de-regulation of oil products, for one, feels that the decision to increase the cap on subsidised cylinders is bad economics. “Very few households in the country use more than six cylinders per year. The cap should have been increased only after increasing the price of subsidised cylinders. Now, the additional three LPG cylinders will be used by people to run their vehicles,” he argued.

As the government struggles to rein in fiscal deficit at 5.3% of the gross domestic product this fiscal, Thursday’s measures could help accelerate economic growth, which has been at its slowest in a decade, experts said.

For, the country is the world’s fourth-biggest oil importer and fuel subsidies are regarded as a drain on the national exchequer.

India imports 80% of the crude oil it refines into diesel — about 3.7 million barrels per day. Diesel accounts for about 40% of India’s fuel consumption. Benchmark Brent crude prices were at their highest annual average on record last year, at around $111 a barrel, significantly raising the country’s energy bill.

The new measures will take effect from April 1, the beginning of the next fiscal. For the period from September 14 last year to March 31 this year, every household will be entitled to five subsidised cylinders.

Housewives may well applaud the government, but those who drive to work in diesel cars will have to shell out more.

The Union cabinet took the decision soon after receiving the approval of the election commission (EC). Under the EC’s model code of conduct, governments are not supposed to announce populist measures ahead of elections. Since Meghalaya, Nagaland and Tripura will go to polls soon, and given that subsidies and fuel prices have the potential to sway electorates, the government had sought the EC’s nod on Wednesday to pre-empt any accusation of being populist.

OMCs need to increase diesel price by Rs9.03 to make it revenue-neutral, smaller price hikes at regular intervals are likely, observers said. The government has told state fuel retailers to raise diesel prices by 40-50paise a litre every month to gradually align them with market rates, a source privy to the development said.

Oil minister Veerappa Moily said diesel prices will go up from Thursday midnight.
If the diesel price is increased by Re1 a month, the subsidy burden on the government will lighten by more than Rs50,000 crore in the next fiscal, said Parekh.

OMCs have reported under-recovery of Rs85,86 crore on the sale of petroleum products till September. In this fiscal to March 31, fuel subsidies are expected to be around Rs1.64 lakh crore.