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The move will help government reduce its subsidy bill and cut fiscal deficit, said petroleum secretary Sthanunathan Sundareshan. So far, prices of petrol, diesel, kerosene and domestic cooking gas were determined by the government. The marketing companies were compensated for the losses by the government and upstream companies.
After Friday’s decision, there will be no under-recovery in petrol. Petrol prices have been de-regulated both at refinery gate and retail. Oil marketing companies (OMCs) will decide the petrol price. This may lead to different prices of petrol at different company’s retail stations in the same city.
The government said that diesel prices may also be linked to market in due course but didn’t divulge a timeline. Prices of kerosene and domestic cooking gas will continue to be under government control.
The under-recovery on kerosene is expected to be Rs 16,500 crore, while on diesel and cooking gas it is likely to be around Rs 15,000 crore and Rs 21,000 crore, respectively.
The step taken by the government will give a new lease of life to state-run OMCs – IOC, BPCL and HPCL. The clarity on fuel pricing will help them attract more investors.
The refiners can start considering selling more shares as their stocks may be fully valued after the government today cut in subsidies on fuels, Sunderashan said.
At present, the state-run OMCs lose close to Rs 215 crore every day. Till Friday, petrol was sold at a discount of Rs 3.73 per litre. They incur a loss of Rs 3.80 on every litre of diesel and Rs 18.82 on a litre of kerosene. Domestic LPG is sold at a loss of Rs 261.90 per 14.2 kg cylinder.
The decision has brought new hope to private fuel retailers in the country, who had to shut their fuel pumps when crude prices shot up to $150 per barrel in 2008. There are nearly 2,500 private fuel stations in the country run by Reliance Industries, Essar Oil and Shell India. Most of them are not operating. Today’s decision will pave the way for more competitive pricing and the sector will see more private participation, Sundareshan told newsmen in New Delhi on Friday.
“This decision reinforces our belief in India's market potential that can be better realised in a deregulating market environment. This move will benefit the consumer in the long run through competitive pricing of fuel products and an offering of better services across outlets. As the largest active private sector fuel retailer in India, we are well placed to capture additional sales for fuel and non-fuel items and expect to see significant volume growth in both areas. We already have in place plans to increase significantly the number of retail fuel outlets that we have across India,” Naresh Nayyar, managing director and chief executive officer of Essar Oil said in a statement on Friday.
The government is already under pressure because of rising food prices. Prices of pulses, milk and fruit continue to rise and inflation hit 16.9 per cent. “These changes, coupled with the price increase for LPG and kerosene, will have an immediate impact on inflation. I expect an increase of 0.9 percentage points in the monthly WPI inflation,” Kaushik Basu, chief economic adviser at finance ministry said in a statement on Friday.
“But, since these changes will cause the fiscal and revenue deficits to decline, they will exert a downward pressure on prices. Hence, though the immediate impact of this policy will be to increase inflation, in six to nine months we will have lower prices than what would have happened in the absence of this much-needed reform,” Basu said.
A high-level panel headed by former planning commission member, Kirit Parikh, had in February recommended liberalisation of petrol and diesel prices, le a hike of Rs 6 per litre of kerosene and Rs 100 increase in every domestic LPG cylinder. Prime minister Manmohan Singh had constituted a panel of empowered group of ministers (eGoM) to review Parikh’s decision. The eGoM headed by finance minister Pranab Mukherjee announced its decisions on Friday when it met for the second time.
The decision has come when international crude oil prices are relatively low and hovering around $77 per barrel.
Petroleum minister Murli Deroa has, however, said that government will intervene if prices shoot up too much. But he didn’t give a parameter of price crossing which government will exercise its control.
Trinamool Congress chief Mamata Banerjee, who was also a member of the eGoM, stayed away from both sessions of the meeting. “I know Banerjee is in town but I don't know why she did not attend the meeting,” Deora said.
“My party does not support this hike. This puts all the pressure on the people. Government should reconsider the decision to increase the price of diesel, kerosene and LPG,” Banerjee told TV news channels.
Bharatiya Janata Party (BJP) has asked for a roll back of the price hike. “We demand an immediate rollback of today's decision hiking fuel prices. The government has made a mockery of the people's trust after winning the elections,” BJP spokesperson Prakash Javadekar told newsmen in New Delhi on Friday.
“The BJP condemns this decision. People are reeling under the cumulative effect of price rise. This government looks to be aiming at finishing the common man,” Javadekar added.
UPA ally, Dravida Munnetra Kazhagam (DMK) also opposed the price hike. However, NCP leader Sharad Pawar attended the eGoM meeting on Friday.
“These reforms would be a game-changer for the PSU oil and gas companies. These reforms are positive for RIL and Essar Oil as well, given that a pan-India roll-out of its refining and marketing business is now imminent,” Mumbai-based Ambit Capital said on Friday.
Citigroup in its report has said given that the impacted fuels have a weight of 5.44 per cent in the WPI, measures would impact inflation by 100bps. This could result in inflation averaging 8 per cent levels in FY11 from 7.4 per cent estimated earlier. “With the economy on the road to recovery, as reflected in industrial production gathering steam, non oil imports and bank credit posting a recovery; coupled with inflation remaining sticky, we maintain our view of 75 bps of tightening in 2010. We expect the RBI to raise rates in the coming weeks,” Citi said.
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