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

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Prashant Mukherjee: New Delhi, Jan 19 2013, 01:25 IST

Despite Thursday’s 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,

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