Thanks to costlier crude, depreciating rupee and fixed fuel price regime in India, the state run oil marketing companies (OMCs) in India are bleeding and the Government is overburdened with a heavy fuel subsidy bill. It's been more than a year and half since petrol prices were deregulated. However, with majority of the burden to meet the public's energy needs falling on diesel which is still regulated, the issue of under recoveries has assumed proportions bigger than ever.
The under recovery burden for the current year is expected to be at Rs 1,210 bn, up 55% on a year on year basis (YoY). While the Government has historically managed to earn net inflows from OMCs (inflows from excise duties on crude and fuel products were higher than outflows as subsidies), with the cut down in custom and excise duties on crude and petroleum products this year, if fuel prices are kept unchanged, the tables will turn as the direct subsidies will exceed inflow from taxes by around Rs 40 bn.
The deregulation of diesel at one go seems unlikely considering it's a mass fuel and will have possible cascading impact on the overall economy and inflation. However, one should not be surprised to see diesel prices getting hiked in a phased manner once the state elections get over by the end of March. With inflation showing signs of easing, it seems to be the right time to finally bite the bullet and go for diesel price hikes in consultation with oil marketing companies. However, this will be just one side of the reform. Any step to deregulate the fuel price at the user level should be simultaneously balanced by rationalizing taxes and duties on the fuel products so as to reflect actual supply and demand dynamics of the market without compromising the viability of the business.