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Jan 18, 2013, 06.26 PM IST | Source: Moneycontrol.com

ICRA: Partial deregulation of diesel positive for PSU OMCs

ICRA has come out with its report/release on impact of partial deregulation of diesel prices. According to the research firm, the major benefit of partial deregulation to the fiscal position of GoI and the OMCs is expected to accrue only from FY 2014 onwards.

ICRA has come out with its report/release on impact of partial deregulation of diesel prices. According to the research firm, the major benefit of partial deregulation to the fiscal position of GoI and the OMCs is expected to accrue only from FY 2014 onwards.

The Government of India (GoI), on January 17, 2013, has decided to partially deregulate diesel prices, which implies that the PSU (public sector undertaking) oil marketing companies (OMCs) have been authorised to revise diesel prices, although by a small amount. Besides, the OMCs are expected to supply diesel to bulk consumers like railways, defence and state transport undertakings at market-determined prices, which would reduces the under-recovery on such volumes (~18% of overall diesel sales). The moves are aimed to reduce the under-recoveries on diesel, which have been contributing more than 50% in the total gross under-recoveries over the last few years.

The lower under-recoveries of PSU OMCs (viz. IOCL , BPCL , and HPCL ) would significantly decrease the subsidy burden of GoI and PSU upstream companies on a full year basis, if this is implemented on a consistent basis. However, there is lack of clarity on the quantum and timelines of revision of diesel prices given the politically sensitive nature of the issue. It may be highlighted that in the past, on some occasions OMCs kept the price of petrol unchanged and sold the petrol below market-determined prices despite petrol being a completely deregulated product.

Prior to the revision, the total diesel under-recovery in FY 2013 was expected to be around Rs. 1000 billion out of total of Rs 1630 billion. Consequent to decision of GoI to partly deregulate diesel prices, OMCs increased prices of diesel by about Rs. 0.50 per litre, which along with further revisions anticipated would result in marginal fall in their under-recoveries for FY 2013. However, the major benefit of partial deregulation to the fiscal position of GoI and the OMCs is expected to accrue only from FY 2014 onwards.

In the past, the diesel prices have been controlled by GoI due to sensitive nature of the product as an auto fuel and its impact on inflation. However, the controlled prices of diesel have negatively impacted the usage of other fuels such as petrol, furnace oil and CNG/PNG, which resulted in an extraordinarily high growth of diesel consumption primarily due to significant rise in diesel-driven vehicle population and usage of diesel for power production replacing furnace oil. Mr K Ravichandran, Senior Vice President and Co-Head, Corporate Ratings, commented “The gradual increase in diesel prices is expected to correct the disparity between prices of diesel and alternative fuels discouraging high growth in sales of diesel-driven passenger cars. Besides, the private retailers are expected to pose increasing competition for the OMCs in the bulk diesel segment due to complete deregulation of prices for the bulk consumers. Further, the increase in diesel price is positive for city gas distribution (CGD) players as CNG and PNG were losing competitiveness in comparison to subsidised diesel."

However, the GoI has increased the number of subsidised LPG (domestic) cylinders to nine from six per annum for each consumer, which would have a marginal negative bearing on PNG segment for CGD companies. The step to restrict subsidised cylinders to six per annum, announced in September 2012, had led to fall in demand of LPG over the last few months; which could also be attributed to lower diversion of LPG (domestic) for commercial purposes. However, the decision to hike the cap of subsidised cylinders to nine per annum would partly roll-back the benefits accruing from the lower diversion to unauthorised uses.

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