After capping of subsidised LPG cylinders last September, market pricing for bulk diesel consumers and a periodic hike for individual consumers are being seen as small steps towards complete pricing freedom for oil marketing companies. In an interview with Jyoti Mukul, Indian Oil chairman and managing director, RS Butola, admits dual pricing will have its challenges though directionally they will be minimising losses: Edited Excerpts:
Since the government has allowed oil marketing companies to increase diesel price in small amounts, it will take you more than a year to wipe out revenue loss on diesel. Does this help?
A view has been taken to pass on the increase in small hikes so it will be quite a while before the underrecoveries will be wiped out but directionally we are minimizing the gap. Also, we will have the flexibility to adjust by a small margin. Price fixation is a function of international price and dollar parity so whether we increase it or not will depend on how these two factors play out. It is a positive move and it gives us the flexibility. We will review it every month and if the optimum solution is to do it more often then we will do that.
Pricing freedom was given to OMCs when the administered price mechanism was dismantled. Do you think the government will allow this phased deregulation in the times to come?
I would not like to guess but now we have more opportunity for price fixation which was not there before this decision.
Will differential pricing be difficult to implement considering that it could lead to diversion?
Almost half of our bulk sales are to the Railways, state transport undertakings, defence and other government entities. Besides, some smaller diversified industry also buys directly from us and sometimes there is a tendency on their part is to tap cheaper supply. So, the possibility of diversion in a big system cannot be ruled out. In dual pricing there is always an incentive to divert and this malpractice then becomes a law and order problem.
Will market pricing for bulk diesel sales put you in direct competition with private refiners?
Competition is good for market. Today we are competing with other refineries on most petroleum products. We have private sector competition in ATF. We have an infrastructure in place. Same thing will continue to apply. Diesel will be one more product. We should not be overly worried about this. But as PSUs we are responsible to so many agencies and have to follow so many procedures which sometimes act against our commercial operations. It is in the nature of our composition to be part of State.
The government wants to replace trade parity with export parity for calculation of underrecoveries. What impact will it have on your company?
As of now, because of trade parity we get a tariff protection by way of customs duty of only 2.5 per cent and that too only on petrol and diesel. Earlier it was 10 per cent and then reduced to 5 per cent and was later made 2.5 per cent. There is no protection in ATF, kerosene and LPG. For crude oil, though the import duty is zero, we buy 25 per cent of our requirement from the domestic producers on which we pay 1.25 per cent sales tax, national calamity cess and other dues which add up to another significant number. Effectively the protection on petrol and diesel works out to just 0.6 per cent. Some refineries in the north-east are finding it difficult to survive and there health will be impacted further by the change in mechanism.
Isn’t the price of LPG and kerosene still a concern?
If it is priced so, the government will have to provide for subsidy.
