Small diesel price hikes not working for private companies

Two months after the partial decontrol of diesel prices, a level playing field between state-owned and private sector oil marketing companies has yet to be achieved.  At present, private players, such as Essar Oil, Reliance Industries and Shell are still selling their fuel at 25 per cent more than the public sector units.

In a conversation with Business Today, S Thangapandian , CEO, Marketing, Essar Oil says that parity will be reached only by January 2014. That is because state owned companies, despite the decontrol, are allowed to raise retail diesel prices only by 50 paise a litre every month.

A Reliance Industries spokesperson said the company is tracking these developments, but refused to comment. Shell mostly has petrol outlets.   

 "We hope that in the sales at the retail outlets will start increasing by January next year, and in the bulk sales vertical the movement in the sales graph would happen by the end of first quarter of fiscal year 2013/14," says Thangapandian. So far sales have not improved.

Meanwhile, ONGC Chairman and Managing Director Sudhir Vasudeva told Business Today that the two hikes in diesel prices might impact the subsidy burden, which his company would have to share. But right now he is not clear about the amount ONGC would have to pay. "Only two miniscule hikes have happened so far, we still do not know about the share we have to pay," he said.  

In second week of February, the government had decided that the subsidy provided for the institutional sale of diesel would be completely withdrawn to bring the oil subsidy bill and the ballooning fiscal deficit under control. A one rupee hike in diesel would mean, Rs 8,000 crore reduction in subsidy, says an official in the petroleum ministry. As per the estimates the under-recoveries in the first nine months of the current fiscal year are Rs 124,854 crore, and the subsidy on diesel is Rs 73,815 crore. Presently, diesel is under-priced by Rs 10.27 compared with international prices.

Of the 70 million tonnes of diesel consumed, 12 million tonnes is consumed by bulk buyers, such as power plants, cement plants and chemical plants, et al. Thangapandian says that they have not seen any surge in this segment either. "The gap between the prices at outlets and for bulk buyer is huge," he says.

On the questions of differential pricing - where  bulk buyers and retailers would be paying different prices - Thangapandian says it has worked in developed economies, but should be planned well by the government. "Presently there is no plan and no system is in place for this. The easiest thing could be if buyers could get excise duty and VAT invoices," he says. The invoices allow the buyers to take tax credits from the government.