Diesel price hike critical for OMCs' liquidity, government finances

Oil marketing companies are losing Rs 14 on every litre of the fuel sold due to the regulation of diesel prices by the government, says CRISIL Research.

Diesel prices were last revised in June 2011. Non-revision of the administered prices of these fuels like diesel, since then, has severely impacted the liquidity and profitability of oil marketing companies (OMCs) and massively inflated the government's subsidy burden. The aggregate losses of over Rs 40,500 crores in a single quarter reported by the three public sector OMC's ( IOC, BPCL and HPCL) is certainly a cause for concern.

As per CRISIL Research, the under-recoveries, which had already increased by 77% in 2011-12 to Rs 138,500 crores (up from Rs 78,200 crore in 2010-11), will continue to be higher in 2012-13 also. In the first quarter of 2012-13 itself, the under-recoveries have increased to Rs 47,800 crore, which is the highest ever quarterly figure.

The report says it is absolutely crucial that prices of regulated fuel like diesel be raised by at least 10-15% immediately and gradually be linked to international prices. The alignment of regulated fuel prices with international prices may affect domestic fuel inflation in the short term, but in the long term, the move would help ease the government's subsidy burden and reduce wasteful consumption of regulated fuels like diesel.

"Deregulation of diesel may not happen overnight. However the government needs to gradually reduce subsidy on diesel and deregulate it within a time frame of 3-5 years," says Alok Churiwala, Managing Director, Churiwala Securities.