India’s government has taken the politically difficult step of raising the controlled price of diesel by 5 rupees/l. (about 9¢/l.). In New Delhi, the new price will be about 47 rupees/l.
State-owned “oil marketing companies”—Indian Oil Corp. Ltd., Bharat Petroleum Corp. Ltd., and Hindustan Petroleum Corp. Ltd.—have sustained heavy losses from the need to buy crude oil at market prices and to sell diesel, kerosine, and LPG at prices held below market levels. They are supposed to be compensated for the consequent “under-recovery” by payments from state-owned producers and the government.
But the government has been accruing its share of the under-recovery liability. It projects that, without a price adjustment, under-recovery during the current fiscal will total the rupee equivalent of about $34 billion.
Of the increase in diesel price, 3.5 rupees/l. will compensate under-recovery, and the rest will be excise duty.
The Cabinet Committee on Political Affairs also agreed to restrict the amount of subsidized LPG delivered to Indian consumers but took no action on publicly distributed kerosine.
Gasoline isn’t strictly subject to price controls, although the OMCs are restricted in timing of price increases and currently sustain under-recovery of about 6 rupees/l. To compensate, the government will cut the excise duty on gasoline by 5.3 rupees/l.
The price and supply actions will face stiff political opposition and won’t fully solve the OMCs’ problems.
After the new actions, the OMCs’ under-recovery during the current fiscal year still will be an estimated $30 billion, which is higher than the prior year’s level.