It is over 15 years since the first expert committee of the Government mooted deregulation of diesel. In fact, the Sundararajan report of 1995 had advocated freeing of all fuel prices as the best way forward for the hydrocarbons sector. At that time, Vijay Kelkar was Petroleum Secretary and he had entrusted the responsibility of preparing a roadmap on pricing to a committee led by U. Sundararajan, who was then Chairman and Managing Director of Bharat Petroleum Corporation.

It is perhaps ironical that the Government has finally heeded yet another Kelkar report suggesting gradual decontrol of diesel prices. There was really no alternative by the end of the day, what with diesel losses threatening to destroy the public sector oil companies and throw the already alarming fiscal deficit out of control.

The inordinate delay in making this a reality should be of little surprise to observers of the oil industry who have seen successive Governments unable to take complete charge of fuel pricing. At one level, it is quite understandable, given that a substantial part of India’s population is still struggling to actually stay afloat. To impose a fuel price hike would have made life impossibly difficult for them.

Yet, there was really no way out, considering that these subsidies were threatening to cripple the same oil companies which supply diesel, petrol and cooking gas across every nook and corner of the country. Diesel already accounts for nearly two-thirds of their projected annual fuel losses of over Rs 1.6 lakh crore. With borrowings going through the roof as a result, IOC, HPCL and BPCL would have been hard-pressed to invest in improving their creaky retail infrastructure or creating new facilities.

Cause for concern

In this background, the Government’s move to allow them to fix diesel price hikes on their own, albeit in small doses, is welcome. For one thing, it will go a long way in gradually reducing the annual losses of over Rs 90,000 crore incurred on retailing the fuel. In the process, it will also reduce the quantum of subsidy support to these refiners, of which a third is met by ONGC, Oil India and Gail while the Government squares up the balance.

All these benefits are expected to percolate into the system from 2013-14 as IOC, HPCL and BPCL go in for small hikes of around 50 paise each month.

Yet, there is some cause for concern. The same Government had knocked off petrol from the administered pricing mechanism in June 2010. It had then grandly announced that the oil companies were free to fix prices.

While one could argue that this indeed was the case (given that petrol has become dearer by nearly 50 per cent since then), there were times when the companies would sit tight and do nothing even while global prices were surging. It only convinced sceptics that the Government finally had the last say with prices, especially when it was the owner of these oil majors. Little wonder that a struggling IOC finally lost it and demanded that price controls be imposed on petrol all over again.

The message was loud and clear: why go through this drama of decontrol when the reality was quite different? Further, IOC’s logic was that it could at least recover losses incurred on the fuel in a controlled price regime. Fortunately, neither HPCL nor BPCL supported this move which was clearly seen as being regressive. This rigmarole should not be repeated for diesel where the oil companies should have the courage and conviction to revise prices at reasonable levels.

Politics vs economics

It remains to be seen if politics triumphs over economics and derails the effort. This should not be allowed to happen as it will only worsen the fiscal deficit and stoke inflation. For free pricing to prevail, it is imperative for the oil refiners to effect revisions independently and not as a cartel, which was generally the case with petrol till recently. This mistake should not be repeated for diesel as it will make a mockery of the deregulation exercise.

There is also justifiable concern that fuel hoarding will be the order of the day in the future with legitimate diesel users struggling to access the fuel. This typically happens when retailers get wind of a price hike and cut the supply lines, hoping to make a fast buck. Just imagine what this would mean to trucks on the highways which are in the queue for diesel.

There is more reason for the oil companies to quietly effect price revisions on their own instead of making a big song and dance before the event. When increases are in the range of 50 paise, there is really no ground to whip up hysteria and go through the drama of a rollback days later.

The coming months will indicate the effects of a gradual diesel price hike. Demand for petrol cars, which has been on the wane for quite sometime now thanks to the price differential, is expected to get back on track. This would be a welcome trend since rapid dieselisation of the automotive sector only reflected an obscene clamour for a subsidised fuel.

It remains to be seen how this move will impact medium and heavy commercial vehicles which are already in the grip of a severe slowdown. Freight rates are bound to increase but will go in line with marginal fuel hikes each month. To that extent, the impact will be relatively minimal though it will still have the potential to scupper household budgets.

Diesel has also found its way into non-transport applications such as generator sets which are being used in many parts of the country reeling under a power shortage. It will be interesting to see if its applications reduce or, conversely, lead to higher electricity bills for factories and residential communities. The silver lining in the cloud is that deregulation could also lead to a fall in prices keeping in line with global trends. For all the worry about paying more for diesel, there is no telling when prices will begin dipping. When that happens, customers will realise the true benefits of free pricing.

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