Diesel price hike coming soon as govt clears deregulation, raises LPG cylinder quota to 9 from 6

Diesel prices in all probability may be hiked by Rs 1.50-2.0 per litre in the first instance that can be as early as tonight following the decision taken by the Cabinet Committee on Political Affairs (CCPA) headed by Prime Minister Manmohan Singh.

Watch video Govt raises LPG cap to 9, allows oil firms to revise diesel prices

The CCPA however left LPG and kerosene prices unchanged.

"The CCPA considered the issue of raising the cap from six to nine and the CCPA has agreed and raised the cap from six cylinders (per household in a year) to nine," Oil Minister M Veerappa Moily told reporters here.

"As far as diesel is concerned, oil marketing companies have been authorised to make price correction from time to time," he said. "It (price correction) can commence even from today."

However, Finance Minister P Chidambaram maintained that the oil companies have been allowed to make "small correction ... I am looking at same subsidy bill as was expected earlier".

Administered diesel price has always been a sensitive issue with the fuel being consumed in large measure by public transport and freight carriers. It is always feared that any hike in its rates can lead to a cascading effect on prices.

Price of diesel was last revised on September 14 when it was hiked by a steep Rs 5.63 per litre. At present, diesel costs Rs 47.15 per litre in Delhi.

Subsidised LPG costs Rs 410.50 per 14.2-kg cylinder and any household requirement beyond the new limit of 9 cylinders will cost a near market price of Rs 895.50 per bottle.

The government had in September capped the supply of subsidised cooking gas to six cylinders per household in a year, with a view to checking diversion to unintended beneficiaries.

However the decision met with widespread protests as only 44 per cent of population used six or less cylinders in a year.

With today's decision, consumers will get five subsidised cylinders instead of the previously mandated three in the period up to March 31, 2013. From April 1, 2013 they will get nine cylinders in a year.

Moily said there will be no change in price of LPG and kerosene.

The increase in the LPG cap would mean an additional subsidy outgo of Rs 9,300 crore annually.

On diesel front, sources said the government has kept the quantum of hike and the timing a secret to avoid petrol pumps stopping sales to make quick profits.

Oil Secretary G C Chaturvedi said CCPA has authorised oil firms to make "small changes over a period of time".

"There was no discussion on the quantum of price increase or the period over which these changes are to be effected. It has been left to the oil companies," he said.

He, however emphatically stated that the government had not deregulated diesel prices. "If we are to deregulate, then diesel price will have to be raised by Rs 9.60 per litre, which is not the case. Only a small quantum of change has been permitted over a period of time."

Asked if it was partial deregulation, he said "it wasn't even partial deregulation." The government, he said, will continue to subsidise diesel, cooking gas and kerosene.

"The finance ministry will meet all of the under recoveries (loss)," he said.

State-owned oil companies sell diesel at a loss of Rs 9.60 per litre, kerosene at Rs 30.64 a litre and LPG at Rs 490.50 per 14.2-kg cylinder.

For the full 2012-13 fiscal, they are projected to lose about Rs 165,000 crore.

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COMMENTARY

VIVEK RAJPAL, STRATEGIST, NOMURA, MUMBAI

"Given oil companies still need to take the approval from government authorities, I am not too excited about this news. Though the first market reaction is positive, I really doubt the sustainability of such a reaction based on this news, especially once markets take a look at details."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI "It's better to make step-wise adjustments rather than a one-off large scale adjustment. Earlier, when petrol prices were de-regulated, they hardly responded to market forces. Today's announcement will depend on how frequently and how genuinely OMCs respond to market forces."

ANOOP VERMA, BOND DEALER, DEVELOPMENT CREDIT BANK, MUMBAI "It is a positive sign. Everyone is however little sceptical about how fast or will it be implemented. The government is the owner of these companies and will always have a say in the pricing. Bonds markets went higher initially but prices gave up some gains later on this scepticism."

ANAND MAHINDRA, CHAIRMAN, MAHINDRA & MAHINDRA, IN A POST ON HIS TWITTER PAGE

"If the minister's statement re oil cos flexibility to tweak diesel prices is the 1st step to price decontrol, then it's a bold & overdue step."

PARAS ADENWALA, PRINCIPAL PORTFOLIO MANAGER, CAPITAL PORTFOLIO ADVISORS, MUMBAI

"The announcement would be productive if in reality OMC would have freedom to raise price in line with international prices.

"This is conditional, we need to understand what is small quantity and what is over a period of time. Do companies really have the freedom to raise prices, or is it again government calling the shots?"

GAUTAM SINGH, ECONOMIST, ANAND RATHI SECURITIES, MUMBAI "Even a one rupee hike in diesel will lead to an 80 billion rupees reduction in subsidy. So, even a 10 rupee hike over a period of time, can have a 400-450 billion rupees impact on the fiscal deficit.

"However, it seems difficult to implement given that the government will face general elections in a year and half."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"The prevailing thought is there is certainly a sense of inevitability considering the huge subsidy burden and the need to maintain the fiscal deficit to GDP ratio at 5.3 percent. In that context, there is inevitability of upward price adjustment in petroleum prices. The magnitude and the timing will be worked out between the government and the OMCs. However, we await clarity."

A. PRASANNA, ECONOMIST, ICICI SECURITIES, PRIMARY DEALERSHIP LTD, MUMBAI

"It's kind of ambiguous. But if they're able to push through the increases over a course of six to seven months, it will improve the prospects for next year's fiscal deficit. However, it will be inflationary.

"This kind of signals there will be regular increases. It will push up inflation expectations, and will lead to second round effects."

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India permits state-run oil firms to raise diesel prices

(Reuters) State-run Indian oil marketing companies can now raise diesel prices in line with increases in global crude oil prices, Oil Minister Veerappa Moily said on Thursday, a move that could help the government reduce its vast subsidy bill.

"Oil marketing companies have been allowed to raise diesel prices in small quantities over a period of time," senior oil ministry official G. C. Chaturvedi said. He did not give details about the time-frame.

India's policy to subsidise retail prices of fuels such as diesel, which accounts for about 40 percent of refined fuel consumption, is a major drain on the budget.

Ratings agencies threatened last year to strip India of its investment-grade credit rating if the government did not take steps to rein-in a widening fiscal deficit. Finance Minister P. Chidambaram has repeatedly vowed that the deficit will not exceed 5.3 percent of GDP this financial year.

India imports more than 80 percent of its fuel needs. The government liberalised petrol prices in June 2010, but has often prevented them from being raised to reflect rising oil prices on global markets.

Fuel consumption in India rose 5 percent in the last fiscal year, its fastest since 2007/08.

Shares in oil marketing companies rose while bond yields fell after Moily's announcement.

Hindustan Petroleum Corp shares surged 5.2 percent while Oil and Natural Gas Corp gained 4.3 percent.

The 10-year yield fell as much 3 basis points to 7.85 percent.

The rupee rose to 54.47/4950 to the dollar from around 54.63/64 previously.

HIGHLIGHTS

* Cap on number of subsidised LPG cylinders raised to 9 per

year: Govt

* Election Commission grants no objection to government's proposal for raising cap on LPG gas quota.

* Govt authorises oil companies to hike diesel prices periodically