Damned if you do, damned if you don’t. This pretty much sums up the Government’s predicament on diesel pricing.
If there is no price hike in the next fortnight, the oil companies will slip deeper into the red, as they are already losing over Rs 10/litre on diesel retail. And should the Government increase prices, the sales of cars and SUVs will be severely hit. Truck operators will also increase their freight charges which, in turn, will stoke inflation.
Reports doing the rounds suggest that the Petroleum Ministry is pushing for a diesel price hike of up to Rs 5/litre. In its view, this is the only way IndianOil, Bharat Petroleum Corporation and Hindustan Petroleum Corporation can stay afloat.
Political opposition
It is a million-dollar question if the Government will actually go ahead, as there is bound to be tremendous political opposition to the move. A hike could also be perceived as a violation of the Government’s commitment on effecting only marginal increases in diesel prices. Since the past few months, the hikes have been in the range of 50 paise/month. To contemplate a hike that is 10 times as much at one go would be catastrophic for the end-user.
Nobody would have thought that the situation would turn so grim almost overnight. Thanks to the small doses of price increases over the months, the oil companies managed to prune their diesel losses to under Rs 4/litre. From their point of view, it was only a matter of months before this would be wiped out and diesel prices, like petrol, would be market-determined.
This was during the calmer days of a relatively stable rupee. However, its rapid haemorrhaging coupled with the spurt in global crude oil prices to over $100/barrel has ruined the script. The oil companies are back to square one and the Government will have to take a tough call in the coming days.
Even as IOC, HPCL and BPCL are also losing big bucks on subsidising cooking gas and kerosene, the diesel burden is greater, as it accounts for over a third of total the fuel losses (now projected at nearly Rs 1,50,000 crore annually). It is precisely for this reason that the Petroleum Ministry is keen on a one-time hike to shave off a large chunk of these losses.
For the automobile industry, already in the midst of a severe slowdown, such a move will only see sales fall further. Till the end of last fiscal, diesel cars were sought after largely because of the huge price differential vis-à-vis petrol. Over the last few months, the gap has gradually reduced to Rs 20/litre and will be further bridged with the next price increase.
Bad timing
The timing could not have been worse for the Government, which is now gearing up for elections next year. It already needs to fund a huge outlay for the recently approved Food Security Bill and this, along with the payouts on fuel, fertiliser and power, will result in a staggering subsidy bill of over Rs 3,00,000 crore. For the moment, there is just no light at the end of the tunnel.