Is Rs 5/litre diesel price hike enough to boost OMCs?

Moneycontrol Bureau

The latest hike in diesel prices by Rs 5 per litre will partially help Hindustan Petroleum, Bharat Petroleum and Indian Oil Corporation recoup losses, say industry watchers. These state-run oil retailers lose around Rs 13-15 on sale of per litre of diesel and are approximately losing Rs 200 crore each day due to government-dictated sale rates.

Simultaneously,  capping six LPG cylinder per household per year on subsidised rate and an excise duty cut on petrol will reduce under-recoveries by around Rs 20,000 crore for oil marketers  altogether

But will this amount facilitate smooth operations for OMCs?
According to rough estimates, OMCs are likely to incur Rs 1.8 lakh crore losses in the current financial year due to sale of petroleum products below market rates. With this announcement, there will be partial recovery of around Rs 20,000 crore.

There is no clarity on the compensations amount which the government gives to OMCs each year for selling fuel at subsidised rates.

IOC, HPCL and BPCL's combined borrowings have soared by 23% Rs 150,000 crore as on June 31, 2012. They still need to further cut down their under-recoveries to manage cash flows.

While these measures would benefit the ailing sector, industry watchers say that the government needs to roll out a de-regulation plan to arrest under recoveries on a sustained basis.

Even after this announcement, OMCs will lose Rs 9 per litre on diesel.

Due to political pressures, there could be some roll-back.

Politically, economically speaking ......

The hike will trim fiscal deficit and improve the economy's credit rating, say analysts. The government raised the price of heavily subsidised diesel in a politically risky move to fight the threat of being the first in the BRICS group of emerging economies to be downgraded to 'junk'

The impact of these hikes on inflation would be around 0.5%-0.6% which is not alarming given the trade off of controlling deficit.