Fuel hike to save oil cos, help government finances: Crisil

Alarmed by the record losses reported by oil marketing majors, ratings agency Crisil said there is an urgent need to increase prices of regulated diesel, kerosene and cooking gas, which will also help government finances.

“Given the crippling under-recoveries of oil marketing companies (OMCs) and a fast deteriorating fiscal situation, a hike in prices of regulated fuels, especially diesel, which accounts for 60 percent of under-recoveries is essential and inevitable,” the agency’s research wing said in a note.

[caption id=“attachment_425084” align=“alignleft” width=“380”]  Diesel prices were revised last in June 2011, and with the coming effect of crude prices moving north. Reuters[/caption]

“It is absolutely crucial that prices of regulated fuels be raised by at least 10-15 percent immediately and gradually be linked to international prices,” it added.

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It said the three state-run oil marketing majors IOC, BPCL and HPCL have reported a combined loss of Rs 40,500 crore, primarily driven by under-recoveries and the absence of government compensation. IOC early this month had reported the nation’s highest ever quarterly loss over Rs 22,000 crore in Q1.

Diesel prices were revised last in June 2011, and with the coming effect of crude prices moving north and a currency depreciation, the under recoveries of OMCs have touched a record high of Rs 47,800 crore during the June quarter, it said.

In 2011-12, the under-recoveries had jumped by 77 percent to Rs 1,38,500 crore and will be higher this fiscal as well, Crisil said. Because of the apparent lack of political will to increase the prices, OMCs are currently facing a loss of Rs 14 per litre on diesel, Rs 29 on kerosene and Rs 250 on every cooking gas cylinder, it said.

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Citing data like jumps in sale of diesel cars and the share of diesel in the total fuel sale mix, Crisil said the under-recoveries can also be attributed to an increased consumption of regulated fuels. A move to increase the prices will reduce wasteful consumption of regulated fuels and also help ease government’s subsidy burden, it said.

Last fiscal, under recoveries constituted 32 percent of the government’s total subsidy burden and chances are that it will increase this year, Crisil said. “The alignment of regulated fuel prices with international prices may affect domestic fuel inflation in the short-term, but in the long term, the move would help ease the government’s subsidy burden and reduce wasteful consumption of regulated fuels like diesel,” it added.

PTI