Public sector oil refiners will have every reason to feel pleased with the petrol price hike. They have already written off nearly Rs 5,000 crore of losses incurred on the fuel in 2011-12 and were dreading an encore this fiscal.
The odd thing about petrol is that it was knocked off the administered pricing mechanism two years ago (June 2010, to be precise). This meant that the trio of IndianOil, Hindustan Petroleum Corporation and Bharat Petroleum Corporation had the right to revise prices without any fear of Government intervention.
This script worked like a charm for some time and there was not too much to worry about as the crude price was ruling at $50/barrel, quite unlike the spiral seen in the first half of 2008-09, when it touched $147. However, this was a brief respite and crude soon started climbing upwards to levels of $70 a barrel. Petrol prices were hiked periodically but, each time, the level of political resistance was also growing.
Little wonder, then, that the Government made it clear to the oil companies during the second half of 2011-12 that they would have to take a break, even though losses on petrol were piling up.
It was also the time of the Uttar Pradesh elections, where any fuel price hike would have been (politically) a suicidal move. IOC, BPCL and HPCL finally ended up absorbing these losses when, in reality, they had been given the freedom to raise prices.
Projected losses
To that extent, Wednesday's announcement was welcome news to the oil companies, though they have a lot more to worry about on diesel, cooking gas and kerosene. The projected losses for these three fuels this fiscal is close to Rs 200,000 crore and diesel, in particular, is a huge area of concern since its applications go beyond the automotive sector. Being the cheaper option, it is replacing furnace oil in industries and is being used extensively in generator sets, thanks to the power crisis across the country.
The oil companies estimate that diesel alone could account for nearly 60 per cent of the losses this year which translates into nearly 120,000 crore. Clearly, this is something the Government cannot afford to square up in full, which means a price increase is inevitable. For the moment, diesel losses are closer to Rs 15/litre but following the huge outcry on the petrol price hike, it would be realistic to expect an increase of around Rs 4 a litre.
Even so, there will still be a gap of over Rs 10 a litre but this may narrow if global crude and product prices cool off in the coming months.
Likewise, even though the subsidy on cooking gas is over Rs 450 per cylinder, the Government will be more inclined to go in for a hike of Rs 50-75 instead. In the not-so-long run, though, more pragmatic measures are likely to be in place which could effectively put a cap on subsidised cylinders for relatively affluent families.
This is the only way the more deserving recipients, who desperately need the subsidy, can balance their household budgets.
Pricing distortions
This, in a sense, reflects the Government's predicament on fuel pricing where the rich get away paying a pittance when they should be paying the market price. Diesel is a prime example of such (price) distortion, where owners of expensive cars and SUVs are making the most of a cheap fuel.
The best way forward is to knock off the subsidy element but that would call for a system of differential pricing, where the transport sector continues to get cheaper diesel. Till that happens, there will only be nominal price hikes which will only increase the burden on the oil companies.
Fuel pricing is going to be among the biggest challenges for the Government this fiscal, especially when it is up against a severe economic slowdown and a scary inflation spiral. If it goes slow on price hikes, its compensation package to IOC, BPCL and HPCL will hit the roof.
The Government has projected a payout of Rs 44,000 crore this fiscal but this could end up being nearly three times as much if prices of diesel, cooking gas and kerosene stay untouched.
This will be nothing short of catastrophic at a time when the fiscal deficit has to be reined in to the projected 5.1 per cent level.
gmurali@thehindu.co.in