For the govt, it’s diesel price hike or fiscal ruin

C Rangarajan, chairman of the prime minister’s Economic Advisory Council, on Monday said a diesel price hike could happen in the next two months. If it doesn’t, said experts, fiscal devastation is assured. That’s the predicament of the government today and it’s only a matter of time before something gives, they said.

Between April and June, oil marketers lost Rs29,042 crore by selling diesel below cost price — or Rs13 for every litre sold. That translates into a loss of Rs405 crore per day.

What’s ominous, too, is that Western nations are braced for more economic stimuli in their countries — done by flooding money — which will crank up the prices of an already high crude oil, apart from equities globally.

Closer home, bleeding oil marketers are gasping for funds to meet daily needs because losses are rising.

Experts said the government needs to act fast lest the fiscal deficit picture deteriorates. Diesel prices were last revised 14 months back in June 2011, along with kerosene and LPG.

“The non-revision has massively inflated the government’s subsidy burden,” said Rahul Prithiani and Kelvin Shah of Crisil Research in a note.

The briskly increasing under-recovery will hurt the government’s fiscal deficit goal as 80% of the targeted oil subsidy will be spent to bear the cost of the subsidy spillover over from last year.

“The government will be left with no option but to borrow additional funds to compensate the OMCs during the year, thereby adversely impacting its own fiscal position, assuming other factors remain constant. This, in turn, would exert further upward pressure on interest rates and will also limit the government’s ability to fund critical social and infrastructure projects,” they said.

Gagan Dixit, analyst with brokerage Quant, said the situation is becoming unsustainable. “From November, demand for diesel peaks across the world due to winter in the US and Europe. At that point, prices rise by $20-25 per barrel over the crude price. That will create a lot of upward pressure on diesel prices in India too,” he said.

Adding to the woes is the relentless increase in consumption.

In April-June, India’s diesel consumption surged 15.6% to 18.38 million tonnes against 15.88 million tonnes in the same quarter last year.

“Add the per-litre loss to rapidly increasing volumes and you know oil companies are in big trouble,” said Dixit.