Is the government missing a chance to deregulate diesel?

With retail diesel revenue loss or under recovery falling to a ten-month low of Rs 5.49 per litre with effect from Wednesday, the time is opportune for linking prices of this highly subsidised fuel to the market. The UPA-led government, however, has decided otherwise and left pricing reform of this politically sensitive fuel to the next government that comes into power a month from now.

Since January 2013, the government-owned oil marketing companies (OMCs) have been raising diesel prices almost every month by Rs 0.50 a litre so that it is eventually market linked. When the last hike in diesel price was announced on February 28, Indian Oil, the biggest fuel retailer, said in a statement that since January 2013, OMCs have been authorised to increase the retail selling price of diesel within a small range every month until further orders.

However, there was no revision in March. On March 31, an Indian Oil statement said the under recovery on diesel is currently Rs 5.93 a litre, below the interim subsidy cap of Rs 6 recommended by the Kirit Parikh headed Expert Group. Hence, the issue of monthly price increase is under consideration of the government and the matter has been referred to the Election Commission. "A decision regarding revision of retail diesel price shall therefore be taken on receipt of further advice by the government", it said.

Interestingly, Indian Oil and the other two OMCs-Bharat Petroleum and Hindustan Petroleum-have announced two consecutive decreases in petrol prices. Experts, however, say that since price hike is not an incentive or benefit there was no need to refer the matter to the Election Commission. "If cuts can happen, there is no reason why hikes can't take place".

Diesel accounts for more than half of the under recoveries or revenue loss of oil marketing companies. OMCs incur revenue loss on sale of diesel, kerosene and domestic cooking gas at government-controlled rates. Of the Rs 161,029 crore loss on these products in FY13, Rs 92,061 crore was on account of diesel alone. In the first three quarters of FY14, diesel loss stood at Rs 47,655 crore while the combined loss from three products was Rs 100,632 crore.

Niraj Mansingka, Associate Director at Edelweiss, said, "We thought that the government would have increased diesel prices this month as it never accepted the recommendations of the Kirit Parikh Report on diesel pricing. A gradual price hike is a good idea to remove the subsidy on diesel keeping in mind the government's fiscal situation. Moreover, this will encourage competition in long term and ultimately benefit the consumers".