OMCs can hike diesel price till under-recovery hits Rs 6/l

Written by Prashant Mukherjee | New Delhi | Updated: Jan 19 2013, 06:55am hrs
Despite Thursdays terse government directive, public sector oil marketing companies (OMCs) are unlikely to be allowed to nullify their under-recoveries on the sale of diesel, the fuel that accounts for about 60% of the gross oil subsidy bill. These firms will be given the freedom to hike retail prices of diesel only till the under-recovery is reduced to R6 a litre (it is R9.10/litre at present), official sources told FE.

It is understood that the government's directive allowing OMCs to hike diesel prices was silent on the quantum and periodicity of the price hikes. The companies on Thursday night raised retail diesel prices by close to 50 paise (excluding taxes).

According to analysts, every Rs 1/litre increase in the price of diesel means an annual saving of R9,000 crore for OMCs, assuming crude oil at $110 and the rupee at 55 to the dollar. Additionally, market-determined pricing for bulk consumers, which account for a fifth of diesel consumption in the country, would reduce the subsidy by around 15% on an annualised basis, given the current oil prices.

On the impact of Thursday's price hike, Indian Oil Corporation (IOC) said in a statement: The under-recoveries on diesel both bulk and retail shall decrease by around R3,400 crore till March 2013. Based on the current prices and volumes, the decrease in the under-recoveries on an annual basis on diesel shall be around R15,000 crore for OMCs as a whole.

Analysts said the liquidity position of OMCs is expected to improve over the medium term, resulting in reduced under-recoveries and lower debt levels.

Hindustan Petroleum Corporation (HPCL) director (finance) Bhaswar Mukherjee said: For us, the savings will mainly be on interest cost on under-recoveries. Part of our subsidy burden was compensated by the government, but we received this after several months and so had to incur interest costs in the meanwhile. This will be saved. He, however, added that the savings on interest costs won't be substantial this fiscal.

Analysts reckon that the proposed gradual increases in diesel prices would help correct the disparity between prices of diesel and alternative fuels like CNG and PNG, benefiting city gas distribution players.

The deregulation of bulk diesel prices would bring in private retailers like Reliance and Essar into this segment of the market, posing competition for state-run retailers.

The lower under-recoveries of PSU OMCs (IOC, HPCL and Bharat Petroleum) would significantly decrease the subsidy burden of GoI and PSU upstream companies on a full-year basis, if this is implemented on a consistent basis. However, there is lack of clarity on the quantum and timelines of revision of diesel prices given the politically sensitive nature of the issue, Icra wrote in a report.

It is likely that the government would let upstream oil companies ONGC, Oil India and GAIL cut their share of the subsidy burden corresponding to, if not more than, the overall decrease in the oil subsidy burden. The hike in the number of subsidised LPG cylinders from six to nine per household per year would, however, increase the under-recoveries by Rs 9,300 crore annually.