The government had said last month it would allow fuel retailers to raise the price of subsidised diesel by 40-50 paise a litre every month and asked bulk buyers to pay market rates.
Now, major oil marketing companies have hiked fuel prices, which should be encouraging for the market.
RK Singh, chairman, Bharat Petroleum Corporation Ltd (BPCL) in an interview to CNBC-TV18 said fuel price hike was not an independent decision but a Cabinet decision. “We have been communicated in clear terms that diesel prices can be raised by 40-50 paise per month, until further orders, to reduce the under-recoveries in a phased manner,” he added.
He applauded this decision, which would not only help under-recoveries but also save put consumers from hardships.
RS Sharma, former CMD, Oil & Natural Gas Corporation (ONGC) also applauded this decision. He said, “I see a very distinct change in the functioning of petroleum ministry and I find decisions getting taken, which is a very positive sign.”
Below is the verbatim transcript of their interview on CNBC-TV18
Q: You have managed that fuel price hike. Was the decision taken independently this time or did you finally have to get a green signal from the government?
Singh: We have been communicated in clear terms that diesel prices can be raised by 40-50 paise per month, until further orders, to reduce the under-recoveries in a phased manner. This was, in my opinion, a great decision by the government of India not to burden the consumer and at the same time reduce the under-recoveries in a phased manner, so that the government burden, oil companies’ burden is lessened to that extent. At the same time consumers are not put to hardships. This was the decision conveyed to us. It was a cabinet decision and we are going ahead with that.
Q: You have got two price hikes in diesel under your belt, you think you will be able to move in March as well or because of some state elections is there an instruction that in March you maybe asked to hold back?
Singh: I am not aware of any such instruction from the government. But let us wait and see. Let us not assume what will happen one month from now.
Q: So two hikes now-- 45 paise each on diesel, where does that still keep your under-recoveries at?
Singh: Diesel prices have also gone up as is the case with crude. Crude, which used to hover around USD 112-113 per barrel, has now moved to USD 118-119 per barrel. The exchange rate has worsened further and diesel prices itself have gone up. Therefore, the under-recovery in diesel which used to be Rs 9 per litre and some paise has jumped to close to Rs 11 per ltire. So, with this reduction by 45 paise, the under-recovery has come down to the level of close to Rs 10 per litre.
Q: There is some concern around the petrol prices though, there has been a huge surge in international prices since January, does the Rs 1.50 hike adequately cover you or are you still making some losses there?
Singh: This was the under-recovery till February 15. So when we hiked the price on February 15 midnight, the under-recovery amount was Rs 1.50 that is what we raised. But you are right, petrol prices now have gone up further and the current under-recovery is about Rs 3. But we will have to see how it behaves in the next 15 days time.
Therefore, next month we will have to take a view as to what is the average under-recovery and then accordingly we will decide whether to raise the price or reduce the price because it can work either way. The prices may go down also. We cannot raise the prices of petrol based on 1-2 days quote. We will have to wait for minimum 15 days.
Q: You have been hearing what the oil marketing companies (OMCs) version is and you have gone through this whole process over a multiyear period, having seen two diesel price hikes are you now getting more hopeful that this will happen for the remaining months of the year as well or do you think state elections will come in the way?
Sharma: One thing is very clear that I see a very distinct change in the functioning of the petroleum ministry and I find decisions getting taken and I feel that is a very positive sign. I have been all along lobbying for this kind of the mechanism that the prices keep getting aligned on a dynamic basis on regular basis rather than in an ad-hoc manner after six months or after one year, and then there is a strong reaction.
The way this mechanism has been put in place, I am extremely happy. The whole mechanism balances the burden of all stakeholders. Let us see in course of time, moving forward if the same adjustments are allowed to be done, I feel that is going to be very positive for the economy, for these companies, for the industry.
Q: Whilst some serious progress has happening on this front. What is not happening is clarity on the subsidy sharing front which investors of many of the companies would like from the government. On that, what are your expectations now that we have started taking small steps in addressing the under-recovery problem?
Sharma: Yes, there also I have been saying very strongly, quite vocally about the mechanism to be put in place. There are two issues. One, is principle. The upstream companies as matter of principle, they have to share the under-recoveries because they have got the upsides of the adventitious gains they get because of the crude prices moving up, the cost do not move in the same proportion. So, the principle is alright, the issue is the mechanism.
Starting with the small step now this decision has been taken that diesel prices will keep getting raised by 40-50 paise a month. I feel it will take another about 20 months or two years to reach that level. I have my apprehensions looking to the political environment or even economic implications of the inflation, whether that will be allowed in the long run to continue but I am very happy that decision taken is in the right perspective.
Q: Now that they seem to be moving with regards to fuel price hike, would you say that the government has been emboldened enough to touch a prickly issue like the gas price hike and whether they will indeed go ahead with the Rangarajan formula, which is so much more positive for companies like ONGC aside from these diesel price hikes?
Sharma: Absolutely, as I said they are very positive signs. We see decision taking on regular basis in petroleum ministry; the situation is no more static. Gas price also, I understand the petroleum ministry has sent the recommendations and the adjustment has to take place. It is more a question of creating right kind of awareness amongst all stakeholders.
When I say, all stakeholders it is the consumers, the politicians. Politicians, across all party lines have to recognize that these companies, which are the backbones of the economy, cannot be allowed to keep getting under-recoveries that they have been doing. We must realize the issue of this governance also because they are the listed companies; there are expectations of the institutional investors, minority shareholders and the morale of the employees itself. Because, I know that in their MoU signing mechanism 50 percent weightage is the financial performance of the company and the companies for several years have not been able to show good financial results.
As a result even employees not getting their legitimate performance related pay and all, I feel that has been the background. In that background, if things are moving forward, I feel that is very positive. Even for the upstream companies, ONGC, Oil India Ltd (OIL), they all should feel comforted with the way the decisions are getting taken.