The government today decided to give oil marketing companies the freedom to make small corrections in diesel prices, but stopped short of deregulating the sector all together.
Moily said that the oil companies have been permitted to raise diesel prices by a small quantum periodically just as they do with petrol till such time that they are able to cover Rs 9.60 per litre loss they incur on the fuel.
“Oil marketing companies have been authorized to raise diesel prices in small quantity over a period of time,” said Moily. However, OMCs are unlikely to announce a price hike today, Reuters reported, quoting a senior government official.
As per the recommendation of the Kelkar Commitee, which was appointed by the Finance Ministry to suggest a road map for fiscal consolidation, oil marketing companies could hike the diesel prices by Rs 1 per litre on a monthly basis.
While Oil Minister Veerappa Moily said the government has allowed the companies to price decisions, oil secretary said it is not a move to deregulate the sector. Even Finance Minister P Chidambaram did not give any time frame for diesel correction.
Confusion prevailed over the mechanism by which oil marketing companies can implement the government decision.
A. Prasanna, economist, ICICI Securties, is quoted by Reuters as saying, “It’s kind of ambiguous. But if they’re able to push through the increases over a course of six to seven months, it will improve the prospects for next year’s fiscal deficit. However, it will be inflationary.
“This kind of signals there will be regular increases. It will push up inflation expectations, and will lead to second round effects.”
Given the threat of a rating downgrade by global rating agencies and the RBI monetary policy coming up on 29 January, the finance ministry had little choice but to adhere to the oil ministry’s demand to raise diesel prices.
The government has not increased the prices of LPG and kerosene, CNBC-TV18 reported.
The market, however, reacted positively to the news as investors took this as a signal that the government is pushing ahead the key reforms measures it has been dithering on.
Deregulation of diesel has been a long standing demand from the oil marketing companies and economists.
State-owned oil companies currently sell diesel at a loss of Rs 10.16 per litre, kerosene at Rs 32.17 a litre and LPG at Rs 490.50 per 14.2-kg cylinder.
Shares of HPCL, BPCL, ONGC and IOC surged up to 5 percent after the news, on optimism that the move will decrease their under-recoveries.
However, CNBC-TV18 reported that oil marketing companies are yet to receive any confirmation on this.
The government has also decided to raise the cap on subsidised LPG cylinders in a year for consumers to nine from six.
The CNBC TV18 report quoting sources said the government yesterday wrote to the Election Commission about the increasing the cap on subsidised LPG cylinder.
The commission has said that the move is not a violation of model code as ongoing scheme, the report said.
Manmohan Singh had earlier warned that the government must raise diesel, kerosene and cooking gas prices in a phased manner as India’s fuel prices are well below international prices.
“Energy remains under priced in our country, with coal, petroleum products and natural gas prices well below international prices. To meet our target of rapid, inclusive and sustainable growth we must undertake a phased rationalisation of energy prices to bring them in line with world prices,” he had said on Monday.
The government’s policy to subsidise prices of fuels such as diesel, which accounts for about 40 percent of refined fuel consumption, is a major drain on the budget.
Ratings agencies threatened last year to strip India of its investment-grade credit rating if the government did not take steps to rein-in a widening fiscal deficit. Finance Minister P. Chidambaram has repeatedly vowed that the deficit will not exceed 5.3 percent of GDP this financial year.