ANALYSIS: Market pricing of bulk sales to have little impact on diesel subsidy

If onions were cheaper by 20 per cent on road side, why would a hotelier go to the retail shop little away from his restaurant? Two months after the government implemented the onion analogy in diesel, the government-controlled oil marketing companies are seeing their bulk consumers going to retail outlets.

Diesel at bulk sale points of oil marketing companies is Rs 12 a litre higher than what the neighbourhood retailer charges a consumer. Obviously, there is a 7 per cent increase in sales through retail outlets and about 37 per cent drop at bulk outlets.

The January 17 decision of the government reversed the situation for bulk diesel consumers. Earlier, they got diesel about Rs 2 a litre cheaper if they went to the installations of Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum instead of going to retail outlets but now they pay 25 per cent more. Currently, there is a Rs 11.26 a litre subsidy on diesel sold through retail outlets. Commercially speaking, a bulk consumer should always be incentivised through discounts but in case of fuel the user has the benefit of passing it on to his customers.

The dual pricing cooking fuel for OMCs has always been a problem but now they are seeing it even in diesel. RS Butola, chairman, Indian Oil Corporation had earlier told Business Standard, that in dual pricing there is always an incentive to divert.

For the government and OMCs, the shifting of bulk consumers would mean that of Rs 12,907-crore reduction in the subsidy bill that was anticipated on an annualized basis in January, only about Rs 5,000 crore would come with a large number of them shifting to retail outlets. But if directionally even the retail price moves towards market rates through piecemeal increases, the incentive to fill up tank at retail outlets will go away at some point.