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Diesel price hike: A much awaited move

The government, in an unprecedented move, announced a diesel price increase of 14 per cent or Rs. 5/litre

and capped the supply of LPG to 6 cylinders per household in a year. Price of other regulated products like

petrol and Kerosene was left unchanged but government reduced the excise duty on Petrol by Rs. 5.3/litre

from Rs. 14.78/litre earlier in order to reduce losses of about Rs. 6/litre on petrol sales. This decision was in

line with a recommendation of the parliamentary standing committee on petroleum and natural gas. CARE

Research believes that this has been one of the boldest policy actions by the government towards solving the

problem of burgeoning under-recoveries plaguing the OMCs and the resulting rise in fiscal deficit for the

country. Price hike and capping of LPG cylinders is expected to together reduce the petroleum under-

recoveries/losses by about Rs. 200 billion in FY 2013, providing partial breather to government finances as

well as to the Oil Marketing Companies (OMCs).

FY 2013 under-recoveries at record highs…

India has been subsidizing the prices of diesel, cooking gas and kerosene which has put a severe strain on

public finances. Diesel, LPG and kerosene prices were last hiked in June’2011. Sharp rise in crude oil prices

with no corresponding policy action has substantially raised the under-recovery on sales of these products.

Losses on these products stood at INR17.1/litre on Diesel, INR347/cylinder on LPG and INR32.7/litre on

Kerosene before the price hike. The OMCs have already reported INR478bn of under-recoveries in 1Q FY

2013, which is the highest quarterly loss reported ever. Depreciation in the rupee since the beginning of FY

2013 has just exacerbated the problem. FY 2013 under-recoveries earlier estimated to be around Rs. 1,850

billion is now expected to come down 1,650 billion following the hike but still up 19 per cent YoY and its

highest ever.

Product wise fortnight under-recovery

Rs. Litre 1 June’12 15 June’12 1 July’12 16 July’12 1 Aug’12 16 Aug’12 1 Sept’12

Diesel 12.5 10.2 9.0 10.0 12.1 13.8 17.1

Kerosene 30.5 30.5 27.0 27.2 28.5 28.5 32.7

LPG 396 396.0 319.0 319.0 231.0 231.0 347.0

Source: PPAC, CARE Research

...putting a strain on OMCs financials

Losses arising from sale of key petroleum products are typically shared by the government, upstream oil

companies viz. ONGC, OIL India, GAIL and the OMCs (IOCL, BPCL and HPCL) according to a proportion

determined by the government. OMCs earnings were strained in FY12 due to weak refining environment,

huge inventory and foreign exchange losses as well rise in interest cost. Interest cost for the OMCs had risen

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Industry Update – Oil & Gas Sector

2 Diesel price hike: A much awaited move

due to delay in cash subsidy payout by the government and the resultant rise in working capital loans. Thus,

while OMCs have borne around Rs. 56 billion on an average during FY 2007-11, they were spared from

sharing any under-recoveries in FY 2012. The total FY 2012 petroleum product losses of Rs. 1,385 billion were

instead shared between the government and the upstream companies in the proportion of 60%/40%. OMCs

financial position further worsened in 1Q FY 2013 with cumulative losses of Rs. 405 billion as under-

recoveries had risen to Rs. 478 billion and absence of subsidy payout from the government. Their debt levels

have shot up by 16 – 40 per cent in FY 2012 YoY. Such a financial stress has also led to severe delays in OMCs’

capital projects.

OMCs quarterly profitability

Source: Company, CARE Research

Diesel Price hike – an inevitable option

This is the first diesel price hike announced since June 25, 2011 despite sharp rise in crude oil and

international diesel prices and the weakening of the rupee. The Oil Marketing companies (OMCs) had been

losing Rs. 12.1/litre on an average for the last 3 months on diesel with losses rising to a massive Rs. 17.1/litre

last fortnight. Out of the total hike of Rs. 5/litre, Rs 3.50 would go towards reducing this deficit while Rs 1.50

is on account of rise in excise duty.

The origins of the diesel price hike goes back to February, 2010 when Mr. Kirit S. Parikh chaired a committee

that recommended fuel price hike to solve the problem of rising under-recoveries. Mr. Parikh has served as

Senior Economic Advisor to United Nations Development Programme from October 1997 to September 1998

and has also been a member of the Economic Advisory Council (EAC) of the Prime Minister of India. He had

recently stated while rise in diesel price hike would push up inflation, but not to increase fuel prices would

also not be helpful. This is basically because as under recoveries go up, the fiscal deficit goes up which will

push up the money supply creating inflationary pressure.

Diesel currently forms 44 per cent of total petroleum product consumption but contributed 61 per cent to

total petroleum under-recoveries in 1Q FY13 up from 59 per cent in FY 2012. Diesel under-recoveries had

Industry Update – Oil & Gas Sector

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risen by a massive 134 per cent YoY in FY 2012 due to rise in international oil prices by 26 per cent YoY and

rupee depreciation. This situation was made worse due to significant difference in diesel prices as compared

to other alternate fuels like petrol. The difference between price of petrol and diesel had at one point in time

crossed Rs. 30/litre making diesel cars more lucrative for buyers. The proportion of diesel cars in total car

sales had increased to 43 per cent in FY 2012 vis-à-vis 20 per cent in FY 2005. Private diesel cars form around

6-7 per cent of total diesel consumption.

Difference between Petrol and Diesel price

Source: PPAC, CARE Research

Petroleum under-recoveries

Source: Company, CARE Research

Industry Update – Oil & Gas Sector

4 Diesel price hike: A much awaited move

Petroleum under-recovery burden sharing

Source: Company, CARE Research

Capping of cylinders – implementation is key

Government has restricted the supply of subsidized LPG cylinders to each consumer to 6 cylinders per

annum i.e. 3 cylinders for the remaining part of the financial year. Any number of cylinders over and above

the cap of 6 cylinders will be available at market rate (currently at Rs 746/cylinder in Delhi). Even though the

above move is expected to reduce the under-recovery by about Rs. 53 billion for the rest of FY 2013,

implementation and enforcement of the move is critical to achieve the desired savings. The under-recovery

on LPG during FY 2013 even after this measure is estimated to be above Rs. 320 billion.

Uncertainty still prevalent but a step in the right direction

Even after the hike, under-recoveries are still expected to be around Rs. 1650 billion. Crude oil prices have

also remained above $110/barrel for most part of this year. Any further rise in oil prices or weakening of

rupee can negate the positive impact of this move. However this step was much awaited and gives a clear

signal of focus on policy reforms and containing the rising fiscal deficit problem of the country. Even though

the price hike could fuel inflation in the short term, but in the long term, the move would help ease the

government’s subsidy burden and encourage more optimum use of the regulated products.

Industry Update – Oil & Gas Sector

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Contact: Revati Kasture Vishal Srivastav Ruchi Mehta Head - CARE Research Manager Deputy Manager revati.kasture@careratings.com vishal.srivastav@careratings.com ruchi.mehta@careratings.com

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