May 24, 2012 01:02 PM IST | Source: CNBC-TV18

Losses on diesel unsustainable; expect hike soon: RS Pandey

Former Oil Secretary RS Pandey tells CNBC-TV18 that a modest hike in diesel prices can be expected soon because the current losses on diesel are unsustainable.

It's been over six months since the last hike in petrol prices and former Oil Secretary RS Pandey believes the government acted too late in this regard. In an interview to CNBC-TV18, Pandey said that the government had postponed this decision for too long, and that it should have moved in tandem with international crude prices.


With regards to the quantum of the hike, Pandey agrees that it is a substantial hike, but it is in line with rising crude prices. "The crude price is also at its highest ever, the devaluation is also at its highest ever, so there was no option," he said.

When it comes to diesel prices, Pandey expects a hike soon because the current losses on diesel are unsustainable. However, he doesn’t expect a significant hike because it will have a huge impact on consumers and manufacturing. "The under recovery is Rs 14-15 a litre on diesel and that much increase is just not possible because it will be counterproductive," he explained.

Also read: Possibility of petrol price rollback to arise in few weeks

He goes on to say that the government should adopt other measures so as to reduce the burden of oil subsides. He suggests moving away from ad valorem tax on fuel, because that only adds to the coffers of the government. "The central government did have a look at it in 2008, they rationalized the excise duty by converting from ad valorem to per litre basis and that should happen for sales tax also," he said.

He believes the rationalization in taxes will help alleviate the burden on petrol users, as well as remove the imbalance in diesel and petrol taxation.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Do you think the government should have hiked petrol incremental shots and not waited for six months and then presented such a large quantum of increase to the market?

A: Yes. Since petrol was deregulated quite sometime back, in the fitness of things the prices should have gone up or down in tandem with the rising international prices or lowering international prices. So it should have happened earlier, but it could not be postponed any long; in fact they have waited for too long.

Q: Do you think this is the way things will move, where the government dithers on movements and not let the market decide for many weeks and months, and then when they cannot avoid doing it any longer they will have an increase? Do you think petrol will move in this direction?

A: Yes it has gone up by 10% at a time, by Rs 7.50 at a time, so the hike is quite substantial. But the crude price is also at its highest ever, the devaluation is also at its highest ever, so there was no option. You had to increase it.

It should have been done incrementally, but maybe there were political compulsions. Now the government has done it, it should go up or down in tandem with international prices henceforth.

Q: I am not disputing that it has to be done, I am asking whether it will continue to move in this ad hoc fashion. According to you, when will it start moving depending on the market and not by when politically the government can push it through?

A: Given the political compulsions operating in the country, I do not think it will move up and down according to market forces. The government will intervene, the political parties, the state governments will ensure that the government will intervenes. That is the way it has been working so far.


Q: What is your expectation from the Empowered Group of Ministers (EGoM) meet? All of us are only speculating, but you have spent a lot of time at the oil secretariat, dealing with ministers, so what do you think is practical and reasonable?

A: Some incremental increase in diesel prices along with some rationalization in the policy on subsidizing LPG and kerosene should come about. One doesn’t know what will happen because an increase in diesel prices has many more ramifications.

If you look at the consumption pattern, while 10% of petroleum consumed in the country in the form of petrol, 42% is the consumption of diesel. So the weightage of diesel price in inflation is quite heavy, and its impact on many sectors is quite heavy. The under recovery is Rs 14-15 a litre on diesel and that much increase is just not possible because it will be counterproductive.

So some increase is possible, but if that doesn’t come about, the other option for the government is to subsidise the oil marketing companies from its own coffers. For the last year, the under recovery was Rs 138,000 crore for three products excluding petrol. For petrol, it was another about Rs 5000 crore. Credit goes to the government for coming to the rescue of the oil marketing companies and giving them a large portion from its own coffers.

They also asked upstream oil companies to contribute, but there is a limit to which they can. The highest possible has already happened. As far as the current year scenario is concerned, it’s much more difficult because Rs 138,000 crore is likely to escalate to about Rs 180,000 crore as per the present reckoning. So if you don’t allow the increase in diesel prices or other petroleum product prices, then you have to subsidize the oil marketing companies and that will lead to other repercussions like the balance of payment position and. Oil marketing companies are the pillars of national economy and it cannot be this weak; these are already quite debilitated.

What should happen is that the state governments should also contribute by having a look at their value added tax (VAT). VAT stands to be on ad valorem basis. When the international prices go up, why should the ad valorem system add to the coffers of the government? The central government did have a look at it in 2008, they rationalized the excise duty by converting from ad valorem to per litre basis and that should happen for sales tax also.

If you look at the petrol prices which was raised last night; in Delhi it is more than Rs 73 per litre, in Mumbai it is more than Rs 78 per litre, in Kolkata it is more than Rs 77 per litre. So if the taxes are rationalized, the common man or the petrol users will get substantial relief. I think that is one area of rationalization that should come about.

There are many other reforms possible and one is on the efficiency use. We are much behind the US, far worse than Japan and even European countries as far as efficiency of petroleum product use is concerned. We are better-off than the Gulf, but they are a major producer and exporter. We have to intensify our efforts at improving the efficiency use and there lies the cue. United States is importing much less crude compared to what they were doing a few years back. Now they have concentrated on improving the efficiency use. That is something which is happening in the country, but the effort needs to be much more intensified.

Q: The government is not reacting to the kind of distortions it is creating in the fuel market with this constant hiking of petrol prices but inability to hike diesel prices. You were saying 42% consumption is diesel, but that could well be more than 50% in the years to come. What kind of ramifications does that have, the fact that we are just encouraging diesel consumption even from the very high levels it already stands at? Can the government afford to be complacent on that front?

A: You have a point. In many countries in the world, the diesel and petrol prices are more or less on a similar level because the taxation levels are similar. In India, the taxation for petrol is much higher than diesel. Crude is the basic raw material for both, but the price difference is mainly on account of the taxation and ideally it should be more or less similar.

Now in India, for a very long time we have had a very high level of taxation on petrol. Eventually, gas should be used as a major transportation fuel. People will say where is the gas in the country, but then where is the crude in the country. You are dependent on external world for everything. You have to intensify your domestic efforts, but till you are able to do that, if you can import crude, you should also be able to import gas.

Even yesterday, the petroleum minister has signed the Tapi agreement and that is a very laudable step in the right direction. We can augment our import of LNG, so I think gas as a transportation fuel has to be promoted in a big way. It is cheaper, it is cleaner and it is another source of fuel. Many other countries are proceeding in that direction and it is time that we take a policy look at the national level and promote the consumption of gas to have an impact on the consumption of diesel as well as petrol.

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