The stage is set for the Government to take the risk of giving complete freedom to public sector oil retailers in deciding diesel prices. But, whether the Government will take the final plunge or not is anyone’s guess.

The Government’s Fiscal Policy Strategy statement tabled in Parliament on July 10 said, “the Government will continue with the policy of calibrated correction in prices…it is expected that the gap between administered and market price of diesel would be eliminated by early financial year 2014-15. Thereafter, both petrol and diesel would be deregulated and linked to market prices…”

However, the mood in the Ministry for Petroleum & Natural Gas is still cautious, and it would rather have the Cabinet Committee on Political Affairs take a final call when the need arises.

OMCs’ view

Oil retailers – Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation – have said that there are still about 20 days to go before the month ends and before retail prices are reviewed.

“We can’t get ecstatic about the situation, as, in October, the current declining trend in global crude prices can change due to rise in winter demand,” said an official from a public sector oil company. Asked if the revenue loss, which the oil retailers incurred on sale of retail diesel at controlled prices has been wiped out with the monthly increase of up to 50 paise a litre, another official said, “We will know only at the end of the month. Currently, it is difficult to say whether it (under-recovery) is eight paise or five paise a litre.”

Industry observers said that the BJP-led Government has nothing to lose by taking this decision, as it already enjoys a majority in Parliament. Besides, sentiments in Maharashtra, one of the key States going to polls, also appear favourably inclined towards the BJP-led alliance.

Raju Kumar, Tax Partner, Oil & Gas practice, EY, said, “The Government has allowed linking of diesel prices with global prices in a phased manner. As the crude oil prices have remained range-bound in the last few months, timing could not be better to consider complete de-regulation of diesel prices.”

Echoing a similar sentiment was Dhaval Joshi, Research Analyst, Emkay Global Financial Services Ltd. He said, “We don’t see any issues for the Government to officially come up with the clear announcement (release or circular), as at the current level of crude oil, diesel price is already market linked (or no under recovery on diesel).”

Another industry observer said that the Government can adopt a similar mechanism like it did for petrol – continue with an artificial/indirect Government control for increase in diesel prices (if crude goes up) for the time being, and subsequently leave it to the oil companies.

This will help reduce the country’s subsidy burden and improve the financial health of the oil retailers, thereby giving thrust to overall development of the sector and encouraging competition in the retail market, said Kumar.

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