Diesel price ‘freed’ in reform push
Jan 17 2013 , New Delhi/Chennai
Prices of food, essentials to go up; modest impact on car, truck, tractor sales
Following a decision by cabinet committee on political affairs on Thursday, oil companies decided to hike diesel prices by 45 paise per litre late Thursday night to partially pare their losses, said industry officials. However, a final notification on diesel price hike was awaited till the time of going to press. Similar increases in diesel prices may be seen each month.
Simultaneously, the government allowed oil-marketing companies to cut petrol prices by 25 paise per litre following correction in crude prices globally.
The proposed hike in diesel prices will impact freight rates and prices of essential commodities and perishables. It would also shift customer preference from diesel vehicles to small petrol cars. Its impact on truck and tractors sales is expected to be modest, industry observers said.
The centre also cleared another proposal to increase the number of subsidised cooking gas cylinders to nine against an earlier decision to limit them to six. But, this decision will become operative beginning April 1.
The Union cabinet took these two decisions after securing approval of Congress president Sonia Gandhi.
Given the political fallout of revising diesel prices, a top official told Financial Chronicle, “We could not have done it without the consent of Congress president”.
With regard to cooking gas cylinders, Gandhi had earlier written to all chief ministers where the party is in power to increase the number of subsidised cylinders to nine. Subsidised LPG is sold at Rs 490.50 per 14.2 kg cylinder.
Oil minister Veerappa Moily told newsmen after a meeting of union cabinet that periodic price revision in diesel prices would be done to cover the Rs 9.60 per litre subsidy that prevails on date.
But, neither the oil minister nor petroleum secretary G C Chaturvedi spelt out details of this decision to allow oil-marketing companies to hike diesel prices.
Oil marketing companies have reported that annually they lose about Rs 96,000 crore on account of diesel priced below market level.
This decision to allow some flexibility to oil companies on retail prices of diesel has been widely described as ‘partial deregulation’.
Even Re 1 increase in diesel prices would translate to reduction in subsidy by about Rs 8,000 crore for the exchequer. Oil ministry has been favouring 50 paise per litre increase in diesel prices each month.
“The decision to increase diesel prices in phases is a step in the positive direction and also means deregulation to an extent. It would improve bottomlines of oil marketing companies” Ajay Arora, a partner with independent consultancy, Ernst & Young told Financial Chronicle.
Several analysts told this newspaper that the political leadership would continue to retain the handle to raise diesel prices. Giving pricing flexibility to oil companies is to only shift the glare away from political leadership given the sensitivity about the so-called “poor man’s fuel”.
Petrol is already sold at free market prices, but diesel has been regulated because of concerns about inflation. Finance minister P Chidambaram said he “was not factoring it” while formulating the budget.
Former ONGC chairman RS Sharma said, “In future, more price correction would happen.” He maintained that the decision on diesel and LPG was “more economic and not political in nature”.
Finance ministry is grappling with serious fiscal constraints, especially with regard to the subsidy burden. Oil companies have estimated that if they had sold all fuels at international rates, they would have gained additional revenue of Rs 1.63 lakh crore in the current financial year.
But, price hike in diesel will have large-scale impact across sectors, including on core inflation.
First, diesel consumed by the agriculture sector would become expensive, thereby likely raising end-commodity prices during the short term. Secondly, it will be a double whammy for automobile makers, trucks and tractors manufacturers, as fuel turns expensive. It may suppress demand for diesel-run vehicles across the board.
The decision to allow hike in diesel prices comes at a time when the government is already toying with idea of increasing excise duty by 2 per cent on diesel-run cars across categories and classes.
But, several vehicle manufacturers put up a brave face on diesel price hike. Mahindra & Mahindra’s president of automotive and farm equipment, Pawan Goenka said, “An increase in diesel price beyond Rs 5 per litre may start impacting over all industry volumes”.
Goenka maintained that diesel price hike would have very little impact on demand for utility and cargo vehicles. However, he conceded that there might be slight shift in demand for passenger cars to petrol segment in small and mid-range.
The cargo vehicles industry expects to achieve stability and fair play in freight rates in the long run. “If diesel price goes up, freight rates will also go up, and thereby, viability of the truck operators will also improve. It will result in hike in freight rates, but there will be resistance to hike. However, it will get corrected and absorbed in a few months’ time,” K Sridharan, chief financial officer, Ashok Leyland told Financial Chronicle.
On the other hand, S P Singh, senior fellow, Indian Foundation of Transport Research and Training (IFTRT) said, “Staggered periodic diesel price revision will lend predictability in truck freight movement and help the trade get rightly priced commodities.”
IFTRT has projected that one rupee increase in diesel per litre would translate to Rs 700 increase in truck rentals on Delhi-Mumbai-Delhi round trip. The foundation has estimated that the impact of diesel price hike on truck rentals for bulk cargo like cement, marble, timber and foodgrains, among others, should be 0.5-0.6 per cent on end products. For fresh fruit and vegetables, the price hike would be 1-1.5 per cent, and on the general merchandise like FMCG, white goods, pharma products and electronic goods, the price increase would be 1.5-2 per cent only.
T R Kesavan, president of Tractor Manufacturers’ Association has maintained that the impact on tractor industry would be modest.