Fuel price reforms set to be first casualty of poll-struck UPA

Written by fe Bureau | New Delhi | Updated: Jan 11 2014, 23:24pm hrs
Fuel pricesThe benefits of the pricing reforms have anyway been negated to an extent over the last one year by a weak rupee that inflated oil import costs (Reuters)
Reforms cant help but make way for politics. Having got into poll mode, the UPA government is set to roll back a good bit of the pricing reform for petroleum products announced a year ago. Soon, subsidies would be reintroduced on bulk diesel sales to state transport undertakings (STUs) and the annual ceiling on the number of subsidised LPG bottles per household would be raised from 9 to 12.

These steps, needless to say, would add to the under-recoveries of oil marketing companies and the subsidy burden on the exchequer and upstream oil marketing companies. The benefits of the pricing reforms have anyway been negated to an extent over the last one year by a weak rupee that inflated oil import costs.

Speaking at the Indian Express Groups Idea Exchange programme on Friday, petroleum and environment minister M Veerappa Moily said: We will shortly take up (the proposal to resume subsidies on bulk diesel sales to STUs) with the Cabinet Committee on Political Affairs (CCPA). However, other bulk users like the defence department and railways will continue buying (the fuel) at market prices.

In January last year, the government had introduced dual pricing policy for diesel under which bulk users of diesel including STUs, the railways and defence got the fuel at market prices, while retail users paid subsidised prices. Oil ministry officials say the policy has not fully served its intended purpose as STUs continue to purchase diesel from retail outlets where prices are currently cheaper by R9.74 per litre, which is the under-recovery oil retailers suffer on diesel.

According to the Petroleum Planning and Analysis Cell (PPAC), the share of bulk diesel sales as a percentage of overall sales dropped from 18% in 2011-12 to 10% in November 2013 mainly on account of STUs shifting diesel purchases from their depot facilities to retail outlets. Diesel sales to buses stands at 10.74% of overall sales of the fuel and STUs account for about 6-7% of that, say sources.

The Kirit Parikh committee on pricing of petroleum products in its report submitted in October had mentioned that STUs had started procuring diesel from retail outlets to take advantage of the significant gap between the price of bulk and retail diesel.

This naturally negated the benefit of dual pricing.

The defence department and railways are compelled to buy diesel at market rates, but the central government funds their expenses.

Sources say the oil ministry has been under pressure from OMCs and state governments to revert to subsidised prices to STUs. Apart from STUs, even some industries like construction and steel have shifted to retail purchases, according to a November report of the PPAC.

Between April and November 2013, India consumed about 45.26 million tonnes (mt) of diesel compared to 45.58 mt during the same period in the previous year. Sources say that all STUs have now started procuring diesel from retail outlets, with the Kerala State Road Transport Corporation (KSRTC) being the last STU to shift to retail purchases.

Earlier this year, the Kerala government had moved the high court, seeking a directive to all oil companies to supply diesel to KSRTC at subsidised rates, considering that it is a public utility. The court had upheld governments view and asked oil companies to continue to provide KSRTC subsidised diesel. But in September, the Supreme Court set aside the high court ruling.

Subsidy on each (subsidised) LPG cylinder is Rs 414 at present, while the market price is Rs 1,021.