Deregulating Diesel: A Long Way From Any Results

In what is the 11th price increase since January this year, diesel prices have gone up by another 50 paise a litre. Including taxes, the price of diesel in Delhi has gone up by 57 paise to touch Rs 53.67 a litre. In Mumbai, it has gone up by 68 paise a litre to touch Rs 60.70 including taxes. The gradual increase put into effect by state-owned oil marketing companies is a part of the government’s move to hike pries incrementally so as to help these companies wipe out their losses.

A fortnight ago, the Oil minister went on record stating that diesel prices will be fully deregulated in the next 6 months. Here is an interesting observation from Anand Srinivasan, Brand Consultant and independent investor in this context. Srinivasan opines that even after the latest round of price hike in diesel, the fuel still remains subsidised by Rs 10 to a litre. For this to go away, either the rupee has to appreciate by 10% or oil prices would have to come down by 10%. Both of these possibilities seem to be unlikely as for now. Considering the pace at which the deregulation is happening (hiking prices by 50 paise every fortnight), it will take at least 6-8 months to cover the entire Rs 10 deficit that companies are facing. Within this period, if the rupee depreciates for any reason (including the commencement of tapering or even on talks of tapering for that matter), the entire exercise of hiking prices gradually will only prove to be a sham.

Many believe that the move to deregulate diesel prices over the next 6 months is a ploy to push the responsibility to the next government (whoever comes to power). Deregulation of prices so close to the elections is a remote political possibility. Obviously, the next government will have to face a subsidy bill of close Rs 70000 crore. This is the differential that is paid out between the sale price and the cost price. This pattern of deficit financing, where the PSU oil companies per se don’t face a loss on their books thanks to the huge dole of subsidies, has been hitting our economy for too long.

Private sector oil companies do not enjoy the benefit of subsidies, yet their financial management seems to be far better than those of our public sector counterparts. For instance, Reliance Industries has a market cap of over Rs 2 lakh crore, a turnover of around Rs 3.71 lakh crore and a PAT margin of 6%. On the other hand, PSU major BPCL has a Rs 24000 crore market cap, sales worth Rs 2.4 lakh crore a year and its profit comes to around Rs 2000 crore, which works out to a net profit ratio of just around 1%. There is a school of thought which feels that petroleum products are meant to boost the economy and not a means of earning irrational profits.

The arguments can be many. For now, the fact of the matter still remains that deregulation of diesel looks nothing more than a mere farce It certainly does not look like it is helping the cause of fiscal consolidation, at least for now. The conditions which can make it look like that are far from achievable in the current economic context. It is time that political thinkers of the nation put their heads together and make some very strong decisions if they are to achieve any meaningful results out of such programmes.