 "Despite climb to price parity, diesel still risky for retailers")
Last fortnight, an event went strangely unacknowledged. Diesel price in India had finally scaled up to reach parity with global prices. The occasion should have been celebrated by oil marketing companies, but no one wanted to talk about it simply because one wasn't sure of what lay ahead. The market parity came with a marginal 35 paise advantage over the fortnightly average of Arab gulf price plus tax, which means that unless the global benchmark price rises again, diesel prices in India can only be cut after this.
It took diesel more than four years after petrol came on a par with global market prices to reach this important landmark. When petrol price was decontrolled and oil marketing companies given pricing freedom in June 2010, the price gap which had to be covered was a little over Rs 3 a litre. In the case of diesel, a decision was taken in January 2013 to allow small increases till parity in market price was reached. At the time, the gap between retail selling price and the market price - or the under-recovery - was Rs 9.60. With a 50 paise increment in price every month, the retail price inched closer to the market rate. The fact that global prices were falling and the rupee-dollar exchange rate remained under control helped the march toward parity.
Here onward, however, the journey will be tougher. Reaching parity with global rates is one thing, but full decontrol of the fuel's price is quite another. For any price change, the companies still have to seek government permission. Unless this system is dispensed with, the precarious situation will continue for the companies. Reducing diesel price to align with global rates will translate into the oil marketing companies losing the opportunity to make up for the past losses on sale of the fuel. In the first quarter ending June 30, 2014, these companies incurred a revenue loss of Rs 9,037 crore by selling diesel below the market rate. And yet, by permitting a price cut, the government can make a political statement about better days in fuel prices.
What decontrol of diesel price or even a stable market parity pricing by oil marketing companies will do, however, is to lure private players back into the retail business. At the peak of its petroleum retail business in 2005-06, Reliance Industries commanded a market share of about 15 per cent in diesel and 7.3 per cent in petrol, with as many as 1,433 outlets across the country. Essar, the first private entrant in the market, too had made significant inroads into the business. But with global prices touching new highs and revenue loss on diesel scaling double digits, the private players did not think it worthwhile to make a re-entry. The deregulation of petrol had not lured them since petrol sales in the country is just one fourth of diesel sales. A deregulated regime for diesel, by contrast, would certainly be attractive.
Going the petrol way
An Essar spokesperson says that following the deregulation of petrol prices in January 2013, the company had become competitive. Pointing out how over the past year, its retail outlets had begun selling petrol, Essar says it anticipates a similar response in the diesel market.
For now, the retail price of diesel being higher than the market price means that the three government companies - Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum - are in a position to book profits even in the second quarter. The three companies cumulatively (selling both diesel and petrol) showed a profit of Rs 3,784 crore in the quarter ending June 30.
Such profits would also help the government save on subsidy in the current financial year. Last year, it shelled out Rs 70,700 crore to meet half the revenue losses incurred by the three companies. While diesel made up 45 per cent of the trio's gross under-recoveries of Rs 1,39,869 crore in 2013-14, the figures should be no more than Rs 19,584 crore in 2014-15. Overall, under-recoveries for diesel, kerosene and LPG for 2014-15 are projected to be Rs 91,665 crore.
Diesel may now bring in profits, but this will not wipe out the under-recoveries because there has been no movement on LPG and kerosene prices. These two fuels accounted for Rs 77,033 crore in revenue loss last year. "Unless the government takes a decision on tackling subsidy on account of sale of LPG and kerosene, oil marketing companies would find it difficult to keep incurring losses on these fuels while competing with private players for diesel," says a senior executive in one of the oil marketing companies.
The scheduled revision of diesel price is due, but with assembly elections in two states and bypolls in other states on October 15, it isn't clear whether the oil companies can lower the price because the model code of conduct will be in place. But a mere price revision is not the only event that interests the business. The clincher will be a signal from the government on pricing freedom for diesel.
It took diesel more than four years after petrol came on a par with global market prices to reach this important landmark. When petrol price was decontrolled and oil marketing companies given pricing freedom in June 2010, the price gap which had to be covered was a little over Rs 3 a litre. In the case of diesel, a decision was taken in January 2013 to allow small increases till parity in market price was reached. At the time, the gap between retail selling price and the market price - or the under-recovery - was Rs 9.60. With a 50 paise increment in price every month, the retail price inched closer to the market rate. The fact that global prices were falling and the rupee-dollar exchange rate remained under control helped the march toward parity.
Here onward, however, the journey will be tougher. Reaching parity with global rates is one thing, but full decontrol of the fuel's price is quite another. For any price change, the companies still have to seek government permission. Unless this system is dispensed with, the precarious situation will continue for the companies. Reducing diesel price to align with global rates will translate into the oil marketing companies losing the opportunity to make up for the past losses on sale of the fuel. In the first quarter ending June 30, 2014, these companies incurred a revenue loss of Rs 9,037 crore by selling diesel below the market rate. And yet, by permitting a price cut, the government can make a political statement about better days in fuel prices.
What decontrol of diesel price or even a stable market parity pricing by oil marketing companies will do, however, is to lure private players back into the retail business. At the peak of its petroleum retail business in 2005-06, Reliance Industries commanded a market share of about 15 per cent in diesel and 7.3 per cent in petrol, with as many as 1,433 outlets across the country. Essar, the first private entrant in the market, too had made significant inroads into the business. But with global prices touching new highs and revenue loss on diesel scaling double digits, the private players did not think it worthwhile to make a re-entry. The deregulation of petrol had not lured them since petrol sales in the country is just one fourth of diesel sales. A deregulated regime for diesel, by contrast, would certainly be attractive.
Going the petrol way
An Essar spokesperson says that following the deregulation of petrol prices in January 2013, the company had become competitive. Pointing out how over the past year, its retail outlets had begun selling petrol, Essar says it anticipates a similar response in the diesel market.
For now, the retail price of diesel being higher than the market price means that the three government companies - Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum - are in a position to book profits even in the second quarter. The three companies cumulatively (selling both diesel and petrol) showed a profit of Rs 3,784 crore in the quarter ending June 30.
Such profits would also help the government save on subsidy in the current financial year. Last year, it shelled out Rs 70,700 crore to meet half the revenue losses incurred by the three companies. While diesel made up 45 per cent of the trio's gross under-recoveries of Rs 1,39,869 crore in 2013-14, the figures should be no more than Rs 19,584 crore in 2014-15. Overall, under-recoveries for diesel, kerosene and LPG for 2014-15 are projected to be Rs 91,665 crore.
Diesel may now bring in profits, but this will not wipe out the under-recoveries because there has been no movement on LPG and kerosene prices. These two fuels accounted for Rs 77,033 crore in revenue loss last year. "Unless the government takes a decision on tackling subsidy on account of sale of LPG and kerosene, oil marketing companies would find it difficult to keep incurring losses on these fuels while competing with private players for diesel," says a senior executive in one of the oil marketing companies.
The scheduled revision of diesel price is due, but with assembly elections in two states and bypolls in other states on October 15, it isn't clear whether the oil companies can lower the price because the model code of conduct will be in place. But a mere price revision is not the only event that interests the business. The clincher will be a signal from the government on pricing freedom for diesel.