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Will fuel prices go up after elections?

First day, first show: The Centre has kept on hold fuel price hikes keeping in mind voters in the election season. But, with losses mounting, the new government will be faced with a tough call when it takes over.

business Updated: May 06, 2014 23:24 IST
Anupama Airy

Even though global crude oil prices are rising, the government, through informal diktats to oil companies, has prevented any increase in the price of petrol, diesel and cooking gas (or LPG). In the election season, populist measures are over-ruling economic considerations even as oil companies claim that under-recoveries (losses incurred on selling diesel, LPG and kerosene below market price) have started mounting. Firms say losses will have to be compensated by the Centre through subsidies even though they have a direct impact on the country’s fiscal health.

Why frequent hikes are required in price of petroleum products?
India is heavily dependant on crude oil imports and any rise in oil prices globally has a direct impact on the domestic price of petrol, diesel, LPG and kerosene. As petrol is a decontrolled product, oil companies are free to adjust its prices. However, prices of diesel, LPG and kerosene are controlled by the government and oil firms cannot revise them on their own.

What are the current losses on sale of diesel, LPG & kerosene?
State-owned oil companies claim that losses or under-recoveries on diesel sales have mounted to Rs 6.80 a litre. Cooking gas (or LPG) cylinder of 14.2 kg is being retailed at a loss of Rs 449.13 a cylinder while losses on kerosene have increased to Rs 33.85 a litre. Effective April 16, 2014, oil companies are now incurring combined daily losses of Rs 342 crore on the sale of diesel, PDS kerosene and domestic LPG.

What are under-recoveries or loss on fuel sales of oil firms?
The three state-owned oil companies — Indian Oil Corp (IOC), Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL) import crude oil by spending billions of dollars every year. However, due to government controls, oil companies are unable to freely price the end products from refineries including diesel, LPG (cooking gas) and kerosene in general and petrol to some extent. This results into losses on sale of these fuels in the domestic market below the actual cost price. These losses are called under-recoveries. During 2013-14, the three state-owned oil firms reported total under-recoveries of Rs 1,39,869 crore.

How are oil companies making profits despite under-recoveries?
The bail out package announced by the government every year — going out of taxes paid by the public — is actually saving oil companies from posting losses in all these years. Despite capping subsidy at low levels, the actual inflow of funds from the exchequer is far higher. Besides cash-rich oil firms such as Oil and Natural Gas Corp (ONGC) and Oil India also subsidise state-owned oil marketing firms (IOC, HPCL and BPCL) for their losses.

How does rupee fluctuation, rise in global prices affect oil firms?
It is estimated that every Rs 1 depreciation of the Indian currency against the US dollar increases the under-recovery of oil companies by about Rs 9,100 crore per annum. For the government, this results into an increase of Rs 8,100 crore in fuel subsidy.

Besides, a rise in global crude oil prices by $1 a barrel increases under-recoveries of OMCs on (diesel, LPG and kerosene) by Rs 3,745 crore.

What if diesel prices are freed?
It has never been easy to raise diesel prices in India. So strong are the political reverberations that the government has chosen to take a hit on its own finances by doling out huge subsidies than to bite the bullet. It is felt that the solution to this menace lies in completely deregulating or freeing diesel prices.

Will fuel prices go up after polls?
With global oil prices rising again, a steep hike in fuel bills is likely after the Lok Sabha elections. Moreover, if rupee also falls against the dollar, the twin impact will show on the pump prices of petrol and diesel. If the ongoing rise in global oil prices continue, a hike in petrol prices can be expected by May end. However, the oil ministry’s corridors are abuzz with rumours that monthly diesel price hike may not be resumed soon.