The Telegraph
Monday , August 4 , 2014
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Slim diesel decontrol hope

New Delhi, Aug. 3: State-owned oil companies are unlikely to get the freedom to sell diesel at market rates when the revenue losses are gone.

The oil ministry is planning to seek the cabinet’s approval to maintain some administrative control on diesel after the under-recovery becomes zero. The losses are already less than Rs 1.50.

“Once the diesel price is on a par with the market rate, we will take the proposal to the cabinet. Unlike petrol, the government does not want to let diesel completely off the hook, as a huge market fluctuation might affect other sectors, too. The cap on the price hike will be a political decision,” a senior oil ministry official said.

The fuel accounts for 44 per cent of the country’s consumption of petroleum products. Therefore, any significant increase in its price can have a cascading effect.

Diesel has a weightage of 4.67 in the wholesale price index (WPI), the highest among the 670 commodities in the index.

“Empirical estimates show that every 10 per cent increase in global crude prices, if fully passed through to domestic prices, could have a direct impact of 1 percentage point increase in overall WPI inflation and the total impact could be about 2 percentage points over time as input cost increases translate to higher output prices across sectors,” N.R. Bhanumurthy of the National Institute of Public Finance and Policy said in a working paper.

However, arguing in favour of decontrolling diesel, he said that “this would enable demand to adjust appropriately to price signals, reduce fiscal deficit and make the inflation number more representative of underlying inflation conditions”.

The difference between the cost of diesel production and the retail selling price has narrowed to Rs 1.33 per litre by the end of July because of the softening of international oil rates, depreciating rupee against the dollar and the new government continuing with monthly prices hikes.

The government had in January 2013 decided to raise diesel prices in small doses of 40-50 paise per litre every month till the losses are completely eliminated.

Rates have cumulatively risen by Rs 11.24 per litre in 18 instalments since January 2013 when the previous UPA government had decided on marginal monthly hikes.

However, this has not dampened sales. Diesel consumption for the second consecutive month grew 3.4 per cent in June and 0.3 per cent during the April-June period. This is the highest growth in diesel consumption since April 2013.

“The main reason for higher growth has been the delayed monsoon leading to a higher use of DG (diesel generator) pumping sets for irrigation, higher vehicular movement because of increased economic activities, power deficit, resumption of mining activities and improved port traffic,” a report prepared by the Petroleum Planning and Analysis Cell said.

The total under-recovery on the sale of sensitive petroleum products stood at Rs 139,869 crore in 2013-14. Of this, Rs 62,837 crore was accounted for by diesel alone.

In the first quarter of this fiscal, PSU oil companies have suffered a loss of Rs 28,691 crore for selling diesel, domestic cooking gas and kerosene below market price. Of this, diesel accounted for Rs 9,037 crore.