Govt may hold diesel price rise, ignore decontrol option

The petroleum & natural gas ministry has decided to discontinue the practice of a monthly diesel price increase, indicating putting on hold its plan for a phased decontrol of the fuel’s price. But this has come at a time when the revenue loss on sale of every litre of diesel has shrunk to Rs 5.93 a litre, which could, perhaps, have given the government the best window to effect a complete decontrol.

Weeks before the United Progressive Alliance (UPA) government’s second term in office ends, the ministry seems to have taken a different view. Since the revenue loss has fallen below the interim subsidy cap suggested by the Kirit Parikh committee, the issue of monthly price increase is under the government’s consideration. The matter has been referred to the Election Commission, as discontinuation of the existing practice can be seen as a populist move.

According to officials, once the Election Commission’s view is known, the matter will be referred to the Cabinet Committee on Political Affairs. At least two months are left before a new government takes charge, so there is time for two monthly price rises of 50 paise a litre each.

The issue of diesel price increase is the second matter that the ministry has referred to the Election Commission. Earlier, the poll panel had refused the government the permission to increase the price of domestic natural gas from April 1 and asked it to wait for the Supreme Court’s judgment on the issue.

Oil marketing companies have been raising diesel prices by 50 paise a month since January 17, 2013, as part of a phased decontrol. The Kirit Parikh committee had in October 2013 recommended a Rs 5 price increase in one go. But the government had not taken that proposal forward. So, it comes as a surprise that it now wants to adhere to the committee’s subsidy cap suggestion, though this was never part of any government decision.

“A decision on revision in retail price for diesel shall be taken on receipt of further advice from the government,” said an Indian Oil statement late Monday.

According to Dhaval Joshi, research analyst, Emkay Global Financial Services, though the decision is political, it might be a temporary pause of one and a half months. “Once the elections are over and a new government comes to power, the phased decontrol may resume.” He, however, did not favour a heavier price increase in one go. “No government would do such a thing because of its significant negative impact on the economy.”

A complete decontrol of diesel price will mean that the government or any of its companies do not have to bear the burden of revenue loss on retail sales of the fuel. That is, there will be no revenue loss, as the retail price will be benchmarked to the 0.05 per cent sulphur content Arab Gulf gasoline price. Applicable tax and margins are built on top of this benchmark price.

The underrecovery had come down to Rs 2.50 a litre because of monthly price increases in May 2013, but the gap again rose to Rs 14.5 in mid-September, primarily due to the rupee's depreciation against the dollar. This fortnight, it is down to Rs 5.93 from Rs 7.16 in the previous 15-day period.

The three state-run oil marketing companies together suffered a revenue loss of around Rs 1,41,000 crore on sale of three controlled products - diesel, LPG and kerosene - last financial year. Of this, Rs 73,000 crore was borne by IndianOil alone.