Current under-recovery on diesel at Rs 17/L: Kotak Instl

The Cabinet Committee on Political Affairs (CCPA) will meet today the Prime Minister’s House today at 5.45 pm to discuss hikes in diesel, LPG. Sources in the know say that the oil ministry is pressing for atleast Rs 4 per litre hike in diesel, and Rs 50 per cylinder hike in LPG.

In an interview to CNBC-TV18, Tarun Lakhotia, analyst, Kotak Institutional Equities says he is looking at under-recoveries of about Rs 1.7-1.9 trillion at a crude price of USD 110-115 per barrel, assuming no price hikes happen in diesel, kerosene and LPG. He is looking at an under-recovery of about Rs 17 per litre on diesel. "If a price hike of Rs 4 happens or is announced by the government today, that will come down to about Rs 13.5. That is quite a high number. Diesel subsidies for the year still may be around Rs 90,000 crore to almost Rs 1 lakh crore," he adds. Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy. Q: If indeed we are not going to see anything at all in terms of a fuel price hike, barring petrol, what is the fiscal deficit calculation or under-recovery calculation? A: Right now, we are looking at under-recoveries of about Rs 1.7-1.9 trillion at a crude price of USD 110-115 per barrel, assuming no price hikes happen in diesel, kerosene and LPG. If this is the case, the fiscal deficit estimates as a percentage of GDP would be higher than 6%. As of now, assuming some price hikes to come through, we expect that to remain at about 5.8%, at USD 110 per barrel crude price. Q: What about the announcement we have today? Perhaps you are going to get Rs 4 increase in diesel prices, and you are likely to see subsidised LPG cylinders getting capped at four-six cylinders. Even assuming the diesel price hike comes in at Rs 4, what do the under-recoveries fall to immediately? A: Diesel, right now, we are looking at an under-recovery of about Rs 17 per litre. If a price hike of Rs 4 happens or is announced by the government today, that will come down to about Rs 13.5. That is quite a high number. Diesel subsidies for the year still may be around Rs 90,000 crore to almost Rs 1 lakh crore. Q: The control of subsidised cylinders that you also speak about in your report, do you think oil marketing companies are ready with the administration of such a provision or do you think you could see some large scale black marketing on account of this or perhaps large scale violation of the rule? A: If you look into the oil marketing companies, they have already implemented LPG transparency portals. In that, probably all of the consumers can very well see how much subsidies they are getting right now and how much LPG cylinders have they already used in the current year. So, given that the back end is ready, I don’t think infrastructure would be a hiccup to that. It’s just a matter of time. Once government gives a go ahead, the oil marketing companies should be in a position to implement capping LPG cylinders to about say four-six per year. _PAGEBREAK_ Q: Your report speaks of probably an income tax exemption that you can give to general consumers. How will that work? That would only replace one kind of subsidy with another kind of loss for the exchequer. It would have to be general available to everyone and therefore not really even serve the purpose of directing the subsidies to the poor. A: What we are talking about, in our report, is government should align diesel prices to global parity levels. And then compensate the consumers who are actually affected by that through some means. For a general consumer, who would be impacted by an indirect inflation because of rise in cost of groceries or household items, we are constituting that impact at about 1 percentage point. So, if government decides to increase the income tax exemption limits from Rs 2-2.5 lakh, it would lead to a saving of Rs 5,150. That will be more than sufficient for the tax paying citizen to basically handle the increased cost of diesel. For people, who are not paying taxes right now, let’s assume if their annual consumption is about Rs 1 lakh, the net impact on them would be about Rs 1,000. That would be very well manageable by them. Looking at other important sector, which is the agriculture sector, they consume about 12% of diesel right now in the country. As per our computation at about 6-6.5% increase in MSP price for rice and wheat, may be more than sufficient to offset the higher diesel cost required for irrigation in agriculture. So, this way we are compensating the affected consumers. At the same time, 20% of diesel, which is being consumed by the industrial sector and as per the recent government survey about 16% is consumed by the automobile owners, one may very well argue that they do not deserve the subsidies in the first place and should be able to pay that upfront. Q: How are you looking at the stocks itself? Do you think that they are past their worst, since now the government has seized that it has to do something about the under-recoveries, it’s only how much that is in debate? Would there be buys on that ground? A: Honestly speaking, if you look into the upstream and downstream names, all of them are building in some expectations of price increase. I would like to believe a Rs 4-5 price increase in diesel and about Rs 50 per cylinder increase in LPG will just save about Rs 20,000 crore of under-recoveries, given that it will be implemented from middle of September. That is already factored into the markets. If government takes some bold decisions like capping the subsidized LPG cylinders to six per household, that would definitely be a positive surprise.