Effect of price-hike too limp; consumer to benefit: Experts

To give offer a perspective on the government's decision to allow oil marketing companies to tweak diesel prices, Maruti Suzuki chairman RC Bhargava and Essar Oil MD and CEO LK Gupta discuss on CNBC-TV18 that the effect of the 45-paise hike in reducing the subsidy is insignificant and uncertain, it will enable competition in the oil sector and ultimately benefit the consumer.

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Below is an edited transcript of the discussion on CNBC-TV18

Q: Does this give the auto sector and industry in general, room to complain?

Bhargava: This is far from freeing up diesel prices because this is a kind of regulated de-regulation. It is unsure for how long the monthly hike of 45 paise will continue. However, even if it is implemented, it is still a long way from making up for the under-recoveries on diesel and bringing petrol and diesel prices at par.

Q: The manner in which the decision to partially deregulate diesel prices continues to be mired in confusion and ambiguity. The oil ministry had proposed to the government a monthly hike of 60 paise per litre of diesel till the under-recovery which today stands at Rs 9.60 per litre was done away with. However the government has decided to change the monthly hike to 45 paise.

Bhargava: If the decision is implemented, the monthly hike of 45 paise per litre till the entire under-recovery is cleared is acceptable and is clear. The auto sector has been demanding for clarity in policy for the next couple of years.

Q: Will you to have to review your plans due to the increased focus on diesel?

Bhargava: No. I don't think so. The diesel capacity which we are installing is for the rollout of another three hundred thousand units. We have an existing capacity of rolling out three hundred thousand diesel engines a year. So, that will give us a total of six hundred thousand unit but by the time this fructifies towards the end of 2014, our production will be somewhere around 1.4 million. So, our diesel-engine capacity is still well below 50 percent of the total production and is not excessive.

Q: Is this music to your ears?

Gupta: It's really a good decision because there are almost 1,400-1,600 retail outlets in operation and none of them are able to sell because of the considerable the difference in the price of diesel between what is sold in the market and the PSU retail pump.

So, directionally I am very happy. But this Rs 0.50-paise rise will not help at all because the difference today is Rs 10 per litre and it is not possible to sustain the difference of Rs 9.50 per litre.

It is a very good decision and indicates that the government is moving towards a scenario where the prices will be freed. I can only assure you that once diesel prices are at par to the market-driven price, consumers will immensely benefit due to options of going to different retailers. There will be competition in the sector which is good and ultimately there will be some management of demand.

Q: Does the private sector interested in returning to the oil sector?

Gupta: Not at this stage, because this increase of 50 paise is neither here nor there though it is a positive indication of the government’s intent towards deregulation. Though this may be temporarily inflationary, ultimately it is in the interest of the consumers.

Q: Though the impact is insignificant for the retail customer, what about bulk supply where rates have been freed and will be market-determined?

Gupta: This is really music to my ears because it will enable competition among refining companies who will be able to deliver much better value to consumers.

Q: With the Budget around the corner and Congress annual meet on Friday, there is going to be discontent from the Opposition which is already out on the streets and discontent within the Congress as well. Will the finance minister to have to dole out freebies in the Budget to pacify the constituency?

Bhargava: Sure. But that has partially been done by increasing the cap on LPG cylinders and reducing the petrol price by Rs 0.25 as sops to soften the impact of the diesel price-increase.