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After allowing oil companies to raise diesel price, the government will have to do a balancing act of generating revenue and protecting common man's interest, said RS Pandey, former oil secretary.
He further told CNBC-TV18 the government is definitely concerned about the impact on consumers and hence the hike will be done in a phased manner for which the time frame is not decided.
Oil companies which have been crying foul about huge under-recoveries will not see the impact of the hike in FY13 as the year has almost come to a close. Oil companies will see a significant reduction in losses next year, he said.
Below is the edited transcript of his interview to CNBC-TV18.
Q: Are you confident that oil companies will be allowed to raise prices every month on diesel because Indian Oil Corporation (IOC) informed us that there is no specific directive outlining that yet from the government?
A: the government announced that oil companies can increase price o fuel but the increase was not clearly defined but we saw the first installment in the form of 45-50 paise a litre. Whether there will be another fuel hike next month will depend on future circumstances. But the current move is very significant. Bulk sales at market price will have several implications. Bulk sales contribute to 20 percent of the total volume and it will significantly make difference in revenues of the OMCs. It will also have implication on the private sector retailers.
Now the sale might shift to private sector there will be intense competition amongst the public sector and private sector OMCs for getting a share of the bulk sales. Thirdly, it will also result in some kind of diversion because dual pricing system at the retail outlet level will be very difficult to implement and that will cause some concerns.
In terms of signal it is very significant that government will not issue formal orders every time an increase is required. As it is the case with petrol. For diesel, the oil companies will increase but the government has clearly said that increases should be small.
So it is a small step towards de-regulation, in a form of regulated de-regulation. The government cannot be oblivious of the interests of the common man. The cabinet also considered the Kelkar Committee report, which proposed a hike diesel, kerosene and LPG but the government untouched the prices of kerosene and LPG, on the other hand the government raised the cap of LPG cylinders from 6 to 9 from the next financial year.
Only in diesel, where the under-recovery was to the extent of Rs 9.60 a litre was touched. Clearly, the government is concerned about the interests of the common man but at the same time a very significant step towards de-regulation has been signaled. Now, how much the prices will increase and at what frequency it will increase besides depending on the crude oil price movement and international price movements in future it will also depend how the domestic political situation and economic situation unfolds itself.
Q: Who do you think the government was trying to nudge ahead in this entire process? Do you think this comes out more positive for the upstream companies some of which will be hitting the market to raise capital or do you think it is the OMCs that have come out the bigger beneficiaries of this process?
A: The overall under recovery will come down. Its impact will not be reflected much in the current financial year but in the next financial year it will be significant. If the under recovery comes down everyone benefits.
The OMCs will benefit, the upstream OMCs also are expected to benefit if their share remains at the same level as it was last year. Now, there is lack of clarity at the moment because the government has not mentioned what will be the share of the upstream oil companies in the overall under recovery.
However, if the share remains at the levels at which it has been in the previous years then if the under recovery comes down the upstream oil companies also are said to gain. So it is a gain for all the three stake holders the government, the upstream oil companies as well as the OMCs.
Q: One of the OMCs said that they were now at liberty to move on prices every fortnight if the situation demanded it. Do you think that kind of pace would be acceptable either in the general system or politically? You think a fortnightly price increase may go down okay?
A: Ideally, that should be the case but it depends on how the situation unfolds itself in the days to come. The burden at the moment has not been too much, it is 45-50 paise per litre increase in diesel and at the same time a reduction of 25 paise per litre on petrol. We saw an increase of 35 paise per litre in the price of petrol three days back. So if this kind of 50 paise plus-minus in the two products takes place then consumers will take it very easily.
The government and OMCs need to closely watch the scenario. The situation today is that it is not fully decontrol where OMCs themselves would take the decision. There should be coordination among OMCs, the government will certainly get involved at least informally and see that the burden on consumer does not go beyond acceptable points.
The signal is clear that we need to deregulate without hurting the common consumer beyond a point. Today's scenario is a result of higher international crude price which was not witnessed before. For the last two years consistently it has been at the level of USD 110 a barrel. It entails a huge burden on our economy. That is how the fiscal deficit strain, the current account deficit strain and the massive under recovery which one never expected and there is no way but to increase the prices one way or the other.
Q: While one applauds what the government is trying to do the history is a problematic one because you will recall that the government said the same thing about petrol a couple of years back in de-regulating it. OMCs were seemingly allowed to do as they pleased but they never could raise prices because of the informal control of the government. Do you see this episode being a similar one to that of what happened with petrol a couple of years back?
A: The government cannot be oblivious of the price increase on the common consumer. After all, the government has to balance the interests of the consumers, OMCs and national economy. So government will have to watch and will have to informally at least get into it even though it has taken a decision that small corrections will be made the word small has not been clearly defined. So government will certainly keep a strict watch on how the situation unfolds.
IOC stock price
On November 30, 2015, Indian Oil Corporation closed at Rs 420.85, up Rs 1.45, or 0.35 percent. The 52-week high of the share was Rs 465.40 and the 52-week low was Rs 307.00.
The company's trailing 12-month (TTM) EPS was at Rs 40.18 per share as per the quarter ended September 2015. The stock's price-to-earnings (P/E) ratio was 10.47. The latest book value of the company is Rs 279.95 per share. At current value, the price-to-book value of the company is 1.50.
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