Government allows oil firms to revise diesel prices; raises LPG cap to nine

Government allows oil firms to revise diesel prices; raises LPG cap to nine

In a move that could help the government reduce its budget-busting subsidy bill, the government has permitted state-run oil marketing companies to set diesel prices, Oil Minister Veerappa Moily said on Thursday. It has also raised the cap on subsidized cooking gas cylinders (LPG) from six a year to nine.

There had been some speculation that the government would announce an increase in diesel prices, but Mr Moily said that decision will now be left to the marketing companies. "For now, there's no revision in the prices of diesel. But the companies are authorised to make price revisions from time to time," the minister said.

The government announcement came with many clarifications that diesel prices are not being de-regulated and that the retailers can make only minor changes.

Finance Minister P Chidamabaram said the oil companies had been "given freedom to make small price corrections." He refused to say how much the quantum or timing of the price hike would be.

Although in effect the oil marketing companies can hike diesel prices from today, sources told NDTV Profit that a price hike today was unlikely and that it could happen next week.

Stocks of oil companies shot up after the news. HPCL ended the day at Rs 365, 5.43 per cent higher, while the IOC stock closed 6.60 per cent higher at Rs. 315.90. BPCL shares closed 6.06 per cent higher at Rs. 345.60.

The other subsidy decision -- to increase the number of subsidised cylinders allowed per household from six to nine -- comes after much political pressure from not just other parties, but also the Congress, that leads the UPA government at the Centre. The increase will be effective from April 2013; for the remaining part of this fiscal year, ending March 31, 2013, the cap has been hiked to five from three.

The decision to limit the use of subsidised LPG cylinders to six per household was taken by the Manmohan Singh government in September last year as part of a bucket of reforms that saw the Triamool Congress quit the coalition government in a huff, reducing it to a minority in the Lok Sabha.

After many protests, the government had decided on a partial rollback of its LPG decision some time ago.

The Congress had already hiked the cap from six to nine in the states it rules. The Centre had recently written to the Election Commission, seeking permission to raise the cap on LPG cylinders to nine, since elections have been announced in Gujarat and Himachal Pradesh and a model code of conduct is in place. The commission examined the request and permitted the Centre to raise the cap.

Mr Moily said many Chief Ministers had written to him saying six subsidised LPG cylinders were just not enough.

India's policy to subsidise retail prices of fuels such as diesel, which accounts for about 40 percent of refined fuel consumption, is a major drain on the budget. State-run refiners currently sell diesel at a loss of Rs. 9.28 per litre.

Ratings agencies threatened last year to strip India of its investment-grade credit rating if the government did not take steps to rein-in a widening fiscal deficit. Mr Chidambaram has repeatedly vowed that the deficit will not exceed 5.3 percent of gross domestic product this financial year.

India imports more than 80 per cent of its fuel needs. The government liberalised petrol prices in June 2010, but has often prevented them from being raised to reflect rising oil prices on global markets.

Fuel consumption in India rose 5 per cent in the last fiscal year, its fastest since 2007-08.

The Oil Ministry had earlier forwarded a note for consideration by the Cabinet, proposing options for meeting a record Rs 160,000 crore deficit arising from selling auto and cooking fuels below costs.

Sources said since the Finance Ministry has refused to bear any additional subsidy arising from raising the cap on supply of subsidised LPG, the Oil Ministry had proposed to make up for the shortfall by raising prices.

It had proposed a Rs 3-4.50 per litre hike in the price of diesel and a Rs 100 hike in the price of LPG along with raising the number of subsidised cooking gas cylinders for households to nine a year.

It had also proposed a quarterly increase of Rs 50 per cylinder from April until the entire losses were wiped off. On diesel, it had proposed a Rs 3-4.50 per litre hike in one go or in monthly instalments of Re 1 or Rs 1.50 per litre.

From April, it wanted Re 1 a litre increase in deisel prices every month till such time that the current loss of Rs 10.16 per litre was wiped out.

Sources said the ministry has also proposed raising kerosene price by 35 paise a litre per month or Re 1 a litre per quarter till March 2015.

According to the ministry's estimates, raising the cap to nine subsidised cylinders will lower savings to Rs 2,500 crore per annum, compared to the savings of Rs 12,000 crore estimated when six cylinders are issued at subsidised rates and the rest were sold at market prices.

With inputs from Reuters