The deregulation of diesel will bring down rates by Rs 3.37 a litre from midnight tonight and will move in tandem with international cost from next month.
This will be the first reduction in diesel rates in over five years. Diesel price were last cut on January 29, 2009 when they were reduced by Rs 2 a litre to Rs 30.86. Rates had since climbed to Rs 58.97. It will cost Rs 55.6 per litre in Delhi from tomorrow.
After deregulation, government will no longer provide subsidy on diesel.
The long-pending decisions in the oil sector were taken at a Cabinet meeting headed by Prime Minister Narendra Modi here.
Against the backdrop of the steep doubling of rates to USD 8.4 recommended by Ranagarajan Committee and cleared by the previous UPA government, the government today approved a 46 per cent increase in natural gas prices that will go up from current USD 4.2 per million British thermal unit to USD 6.17 per mmBtu from November 1.
Briefing reporters, Finance Minister Arun Jaitley said the price was "sufficient incentive for drilling and investment" while at the same time "not excessively burden the consumers."
The gas price hike, according to a modified formula approved by the Cabinet, comes to USD 5.61 per mmBtu on gross-calorific value basis and USD 6.17 as per net calorific value - the principle used for calculating current USD 4.2 rate.
Rates for the gas produced by Mukesh Ambani-run Reliance Industries as well as state-owned ONGC will be revised every six months with the next review happening on April 1.
The natural gas price increase will result in CNG prices going up by Rs 4.25 per kg and piped cooking gas by Rs 2.6 even though Oil Minister Dharmendra Pradhan said states are being impressed upon to cut taxes to reduce the burden.
Besides, tariff for power produced from gas will go up by about 90 paisa per unit and fertilizer production cost by almost Rs 2,720 per ton.
RIL will however not get the new gas price for its currently producing Dhirubhai-1 and 3 gas fields in eastern offshore KG-D6 till it makes up for the shortfall in production in the past four years.
D1&D3 is producing under 8 million standard cubic meters per day against a committed 80 mmscmd. Consumers of RIL gas will have to pay higher rates but RIL will get only USD 4.2, with the difference being credited to a gas pool account maintained by GAIL.
RIL will get the higher price if it is able to prove legally that output fall was not deliberate and was due to geological reasons as it claims.
Jaitley said after deregulation, the price of diesel would be linked to the market and move in tandem with cost.
Indian Oil Corp (IOC) Chairman B Ashok said, "Consequent to the decision of the Government of India to deregulate diesel price, we have decided to reduce the prices. In Delhi, the prices are likely to go down by Rs 3.37 per litre."
Jaitley said the Cabinet also decided to relaunch the direct benefit transfer (DBT) in a more effective manner.
"The UPA government had only linked it to the Aadhaar platform. There were some legal issues including some court orders, which had prevented the effective implementation of the scheme," he said.
Under the Jan Dhan Yojana, so far 6.02 crore accounts have been opened and it has been decided that in addition to the Aadhaar platform all those who have a bank account will also get the LPG subsidy in their accounts directly.
"There will be mission mode of implementation of the DBT scheme from November 10, 2014 to January 1, 2015, the quantum of subsidy will be decided by government," he said.
On gas price hike, Jaitley said a committee of secretaries was appointed to look into the Rangarajan formula. They reworked the formula and the Cabinet approved it.
Oil Minister Dharmendra Pradhan said the Rangarajan formula has been dropped and a new one framed. "The government had two challenges -- end-user being our primary concern. Equally, investor is also a concern."
"Investment will not come in controlled regime, it is necessary to debottleneck and make (it) dynamic, transparent and hassle free," he said.
On RIL, he said, the government "has not made the policy to either isolate or favour or trouble any company. Those who did, they have been voted out."
About 85 per cent of the price hike will go to PSUs. Revenue impact on ONGC will be Rs 6,200 crore and on Oil India it will be Rs 700 crore, he said.
The government has also decided to give 40 per cent subsidy to private companies for oil exploration in North East.
Higher gas prices would increase the expense of running power stations and fertilizer plants, raising infrastructure and food costs and accelerating the rate of inflation.
Every dollar increase in gas price will lead to a Rs 1,370 per tonne rise in urea production cost and a 45 paise per unit increase in electricity tariff (for just the 7 per cent of the nation's power generation capacity based on gas).
Also, there would be a minimum Rs 2.81 per kg increase in CNG price and a Rs 1.89 per standard cubic metre hike in piped cooking gas.
Gas price increase had been deferred on three occasions previously.
The previous UPA government had in June last year approved a price formula suggested by a panel headed by C Rangarajan and re-confirmed it in December 2013 with certain conditions for Reliance Industries' eastern offshore KG-D6 block.
The formula was to be implemented from April 1, 2014, when the tenure of USD 4.205 per million British thermal unit price fixed for KG-D6 gas was to expire, but before a rate could be notified, general elections were announced and Election Commission asked the then government to defer it till completion of polls.
On June 25, the new BJP-led government deferred it for a further three months to September-end saying the issue required "comprehensive consultations."
The revision was again deferred by 45 days on September 24 as the government seemed wary of taking an unpopular decision on just before assembly election in crucial states of Maharashtra and Haryana.
The formula, which was notified on January 10, will more than double the current USD 4.2 per million British thermal units. The new gas price was to be applicable to both state-owned ONGC produced fuel as well as private sector RIL's gas.
The delay in gas prices had most affected Reliance Industries and state-owned Oil and Natural Gas Corp (ONGC). RIL and its partners BP plc of UK and Canada's Niko Resources on July 6 slapped an arbitration notice on the government seeking implementation of a gas price revision which was due to them on April 1.
For ONGC, the nation's largest gas producer, the postponement of price increase was seen as a dampener to its stock valuation particularly when the government had plans to sell a 5 per cent stake in the company to help narrow budget deficit.
India's offshore oil and gas industry is "at risk" in the absence of higher gas prices, BP CEO Robert Dudley had said on June 17.
RIL has been selling gas from KG-D6 at the same price since it started production in April 2009. The government increased ONGC and Oil India Ltd's selling price to match RIL's in May 2010.