Energy, its use and pricing, has an important bearing on the Indian economy. For instance, a rise in crude prices in India has a direct impact on the wallet of the Indian consumer and automatically dampens demand and growth. And so it comes as no surprise that the government and politics play a crucial role with respect to where crude prices are headed in India.
Thus, until recently, prices of petrol, diesel, LPG and kerosene were heavily subsidized by the Indian government so that the retail consumer did not feel the pinch of higher oil prices globally. This has not augured well for energy companies in India who have had to contend with much lower realisations especially in a rising crude scenario. Obviously, their losses swelled and although the government chose to compensate by issuing oil bonds to these companies, it has hardly achieved much. Retaining vote banks being a major priority, the government has so far not had the will to raise prices and ruin its chances of holding on to its seat of power. But someone has to pay and therefore these subsidies have come at a high price to the Indian government. With the government's balance sheet already in a precarious state, higher subsidies were only piling on the pressure.
What has also been a spoke in the wheel for the government in recent times is rising inflation on account of higher food prices. Thus, the government took the decision to free petrol prices but has still kept the prices of diesel, kerosene and LPG under control. Here too, politics have played a part. For instance, oil companies were making a loss of around Rs 10 per litre on petrol before it was freed. Once it was done so, oil companies did not raise prices as they were 'informally' asked by the oil ministry to refrain from doing so since the assembly elections of 5 states were just around the corner. Now that the elections are over, petrol prices have been raised by Rs 5 per litre and more hikes are expected to be on the cards going forward.
With diesel consumption being more than that of petrol, raising prices of this fuel has seen reluctance on the part of the government for fear that it will have a negative bearing on future elections. Oil companies, meanwhile, have not been entirely relieved of their pain. Although, they are now to receive oil subsidy in the form of cash rather than bonds and even though petrol prices have been freed, they are still witnessing a pressure on profitability. In fact, losses on regulated retail prices are expected to double this fiscal as oil prices have continued to remain on firmer ground.
Indeed, as long as global crude prices remain firm, it looks highly unlikely that the Indian government will tamper with the pricing of diesel and other fuels. How the oil companies in India choose to contend with this will determine their fortunes in the future.