Diesel freed, gas wait for Ambani

Mukesh Ambani

TT, New Delhi, Oct. 18: The Narendra Modi government today deregulated diesel prices, announced a gas pricing formula whose benefit will not immediately be available to Mukesh Ambani’s Reliance and revived the UPA’s plan to directly transfer LPG subsidy.

The decision to decontrol the price of diesel, once considered a political holy cow, permits oil marketing companies to fix market-determined pump prices for the first time for the fuel that powers trucks, buses, luxury sedans and sports utility vehicles.

The immediate upshot of the long-awaited market reform was a cut of Rs 3.51 in the price of diesel to Rs 60.30 per litre in Calcutta, largely a result of falling global crude oil prices. If and when global prices rise, the domestic diesel price will also go up.

This is the first cut in diesel prices in over five years. Diesel rates were last reduced on January 29, 2009, trimmed by Rs 2 a litre to Rs 30.86.

With the diesel deregulation, the government will pay subsidies only on gas cylinders and kerosene.

The cabinet committee on economic affairs (CCEA) also accepted a new pricing formula that would raise the price of natural gas to $5.61 per million British thermal units (MBTU) from $4.20 earlier.

But the new price will elude Mukesh Ambani’s Reliance Industries as its KG field would not qualify for the new price because of a shortfall in gas output. (See Business)

Gas pricing had become contentious after a committee formed by the UPA government and headed by C. Rangarajan had recommended a formula that would have raised the price to $8.40. The Election Commission had stopped the UPA from implementing that decision from April 1 because of the polls in May.

The hike in gas prices is expected to raise the rates for fertilisers, gas-based power, compressed natural gas that powers auto-rickshaws, and piped natural gas in cities like Delhi and Mumbai.

The government decided to pay the subsidy on gas cylinders directly into the bank accounts of consumers. The process will begin from mid-November in 54 districts. The rest of the country will be covered from January. Bengal does not figure in the first phase.

“Those who do not have a bank account will continue to receive subsidised LPG gas cylinders,” finance minister Arun Jaitley said.

The NDA government under Atal Bihari Vajpayee had removed price controls on petrol in 2002. The UPA government under Manmohan Singh was forced to step in and re-impose price caps when crude oil prices started to rise.

Petrol was eventually deregulated in June 2010 by the Manmohan government. At that time, the UPA government had also decided in principle to free diesel prices.

However, a surge in global crude prices forced the UPA government to put that decision on hold as it would have sparked a public outcry over a spurt in diesel prices that would have cranked up inflation.

Under the UPA, diesel prices were raised 19 times since January 2013 — a cumulative hike of Rs 11.81 per litre.

Diesel has a weight of 4.67 in the wholesale price index, the highest among the 670 commodities in the index. A fall in diesel prices is expected to trigger a dip in inflation in the next few months.

Inflation based on the consumer price index was put at 6.46 per cent in September. The RBI had predicted that inflation would dip in November before rising to 8 per cent by March. The diesel price cut changes the assumptions in the RBI forecast.

The government has had to fork out a diesel subsidy of Rs 4,687 crore — most of which was paid out in the first quarter between April and June. Official figures show that since September 16, the oil marketing companies have not incurred any losses on the sale of diesel. On the contrary, they were gaining about Rs 3.56 per litre of diesel — a benefit that they have now passed on to consumers.

Last year, the government had to pay a diesel subsidy of Rs 62,837 crore. Jaitley has budgeted for petroleum subsidies of Rs 63,400 crore this year, which is 25 per cent lower than the previous financial year’s.

The Indian basket of imported crude oils has fallen to $ 83.85 per barrel as on October 15. Diesel accounts for 44 per cent of the total consumption of petroleum products in the country.