Ind-Ra Market Wire: Now is the time to Decontrol Diesel Prices

India Ratings & Research (Ind-Ra) believes that the staggered diesel price hike since end October 2012 has paved the way for diesel price decontrol and that now is the right time for the government to decontrol diesel price and allow oil marketing companies (OMCs) to price diesel according to global rates. This will help the government achieve its fiscal consolidation targets.

On 14 September 2012 the price of diesel price was increased by INR5/litre and thereafter OMCs were allowed to increase diesel prices by around INR0.50/litre/month. The policy of a monthly hike in diesel prices, initiated by the earlier government is being continued by the present government. Ind-Ra believes that apart from improving the financial position of OMCs, the staggered increase in diesel prices will also help the central government in achieving its FY15 fiscal deficit target of 4.1% of GDP.

While the staggered diesel price hike helped in reducing the under recovery on diesel to a record low of INR0.08/litre as on 1 September 2014, the decline in global crude oil prices and rupee appreciation have also helped in reducing this gap. When diesel prices were increased by around INR5/litre on 14 September 2012, during the first fortnight of September 2012, the Indian crude oil basket was priced at USD113.64/barrel (bbl), the currency was at INR55.47/USD leading to under recovery of INR13.86/litre and total daily under recovery of OMCs at INR4.98bn.

Between the first fortnight of September 2012 and the second fortnight of May 2013, while the rupee remained stable, the price of the Indian crude basket declined to USD101.07/bbl, the under recovery on diesel declined to INR3.73/litre and total under recovery of OMCs to INR2.52/bbl. Sharp depreciation of the Indian rupee during June-August 2013, increased both, the under recovery on diesel and the total daily under recovery to INR12.12/litre and INR4.86bn, respectively.

The sharp under recovery on diesel was mainly responsible for the increase in total under recovery of the oil sector and the government's fuel subsidy burden in FY12 and FY13. Staggered diesel price hike not only limited the impact on inflation, but also brought down the total under recovery to INR1,398.69bn in FY14 from INR1,610.29bn in FY13.

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