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Oil manufacturing companies (OMCs) have announced a diesel price hike of INR 1.09 per litre (excluding state levies), thereby compensating for the last two months’ gap in monthly price hikes of INR 0.50 per litre. Diesel price in Delhi now stands at INR 56.70 a litre, while petrol price stands at INR 71.40 per litre.

 After the price hike, diesel loss stands at INR 5.70 a litre. This price hike re-affirms the positive stance on diesel reforms and the new government is expected to continue with the same. Sustained high oil prices and rupee depreciation had scuttled the benefits of 2013 price hikes. However, with both these factors stabilizing, the under-recovery is expected to reduce at a rapid pace-it is expected to fall by 38Percent from FY14 level of INR 1.4 trillion to INR 88,100 crore in FY16.

Petrol presently is fully deregulated with 23 price revisions since January 2013. The overall under-recovery is expected to decline by around 50Percent in FY16 versus INR 88,100 crore in FY13. Product-wise, the under-recovery stands at INR5.70 a litre for diesel, INR33.90 for kerosene and INR449 a cylinder for liquefied petroleum gas.

For OMCs, in the initial period of reforms, earnings growth would be from reduction in interest cost, which could be followed by likely large delta in diesel marketing margins, post deregulation. Further, impending gas price hike from $4.2 per million british thermal unit (mbtu) to around $8 per mbtu is positive for gas producers such as Oil and Natural Gas Corp. Ltd, Oil India Ltd and Reliance Industries Ltd.

Another development was that the Election Commission (EC) rejected the proposal of the ministry of petroleum and natural gas (MoPNG) to review the diesel price hike if loss is less than INR6 per litre. On 31.03.2014, the ministry had approached the EC to advice on further price hikes as the then diesel loss was below INR6 a litre—which was the interim subsidy cap according to the Kirit Parikh Committee’s recommendation. MoPNG had approached the EC just before the start of the general elections, but the decision has come only after completion of voting.

EC’s rejection of the March proposal has resulted in OMCs effecting a combined price hike for the past two months. However, the overall diesel reforms are firmly on track, and less than 12 months away from full deregulation. Since the monthly diesel price hike commenced in January 2013, OMCs have increased the diesel price by INR 9.70 per litre (21Percent). Despite political sensitivity, diesel price hikes have been largely smooth throughout 2013 and now even in 2014, implying the strong economic need to go ahead with fuel reforms.

This, however, does not mean that hiccups or delays in implementation of price hikes can be ruled out. The government is expected to remain largely on track on diesel reforms.

Source-On Request