Small hikes in diesel prices lead to big cut in consumption growth

Nov 22 2013, 11:25 IST
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Consumption of high-speed diesel, subsidy on which has long been a big drain on the exchequer, has hardly grown in Jan-Oct 2013. Consumption of high-speed diesel, subsidy on which has long been a big drain on the exchequer, has hardly grown in Jan-Oct 2013.
SummaryThe pricing reforms in diesel and LPG, was unleashed in January this year.

The pricing reforms in diesel and LPG, unleashed in January this year, coupled with the economic slowdown have dented the consumption of both these fuels. The fall in demand for these fuels, which are still heavily subsidised, has been big enough to significantly reduce the growth in the country’s overall consumption of petroleum products. This is even as use of petrol, which is decontrolled, has only grown faster.

Diesel price

According to the Petroleum Planning and Analysis Cell (PPAC) data, consumption of high-speed diesel (HSD), subsidy on which has long been a big drain on the exchequer, has hardly grown in January-October 2013, compared with around a 10% increase in the corresponding period last year. In fact, in six out of the 10 months to October, diesel consumption has shown negative year-on-year growth, with June representing the inflection point.

This would doubtless help policymakers, who aim to reduce diesel’s share of fuel subsidy to 46% in the current fiscal, from 59% in FY12.

Similarly, consumption of LPG, subsidised sale of which was restricted since January by limiting the number of low-priced cylinders per household to 9 in a year, grew just 0.31% in the first 10 months of 2013 compared with 4.7% in the year-ago period.

The higher-than-expected elasticity of demand for these “sensitive products” to the price increases would likely have a salutary impact on the central budget, the country’s balance of payments and upstream oil firms’ finances.

Retail diesel prices have been hiked 50 paise a month since January almost unfailingly (the government says this fuel would be deregulated in six months). Pricing reform for LPG is also under way, although experts ask for sharper hikes in its prices.

Overall consumption of petroleum products including decontrolled products like naphtha (which goes into the petrochemical value chain), furnace oil and LSHS and petroleum coke have also shown a significant decline in growth in January-October 2103 — 1.69% against 6.96% in the corresponding period a year ago. The growth, comfortingly for the policymakers, has been lower than the 4.1% projected by the PPAC for FY14.

India is the world’s third-largest consumer of petroleum products, with consumption of 157 million tonnes in FY13, even as less than a quarter of that demand is met by domestic production.

The fall in fuel demand growth cannot be attributed solely to the economic slowdown (the economy grew a dismal

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