How Diesel Price Deregulation in India Helps Private and Public Refiners

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Benefit to Upstream Public Sector Oil and Gas Companies

As upstream public sector oil and gas companies such as ONGC, OIL and GAIL shared the under-recoveries of OMCs along with the government by giving discount in prices of the products sold to OMCs, their profitability, too, was hit. Their revenue was significantly impacted due to sharing of under-recoveries of the OMCs. Of three companies, ONGC and OIL were hit hard as they had to forgo a major part of their revenue to share under-recoveries of OMCs.

ONGC had to part with more than 60 per cent of its total revenue, and OIL in excess of 75 per cent, to compensate losses of OMCs in 2013–14 (refer to Table 2). But for the subsidy burden, ONGC’s total revenue would have increased by more than 50 per cent of its reported revenue in each of 2011–12, 2012–13 and 2013–14. OIL’s total revenue would have gone up by more than 65 per cent of its reported revenue in the mentioned years had it not shared the fuel subsidy (refer to Table 2). With deregulation of diesel prices, their share of subsidy is likely to decline considerably and, hence, their revenue and profitability can improve substantially provided the Government does not increase their share of subsidy.

Deregulated prices of the two major petroleum products will be beneficial to the Indian economy as a whole.
(Source: Financial Results/Annual Reports of the companies)

Benefits to the Economy as a Whole

Of the total under-recoveries of `1398.7 Billion of three OMCs in 2013–14, upstream companies ONGC, OIL and GAIL shared `670.2 billion, while OMCs themselves absorbed an amount of `20.8 billion. Remaining amount of `707.7 billion was compensated by the Government by way of subsidy. This subsidy burden impacted fiscal situation of the Government adversely. The government’s fuel subsidy amounted to 13.5 per cent of estimated fiscal deficit for 2013–14. Thus, fuel subsidy was a major contributor to the Government’s fiscal deficit. The contribution of fuel subsidy to the government’s fiscal deficit was much higher in 2011–12 and 2012–13 (refer to Table 3). With deregulation of diesel prices, the Government’s fuel subsidy bill can be reduced significantly which can help reduce the fiscal deficit. As the fiscal situation is already strained, any step towards reduction of fiscal deficit is a big positive for Indian economy.

Secondly, diesel price deregulation provides a level playing field to private refiners who can sell petrol and diesel directly into domestic retail market. This can create a competitive environment prompting state-run refiners to improve their operational efficiency, which can further bring down the prices of petrol and diesel provided international crude prices are stable. This, in turn, can ease the inflation which is a major factor for the growth of Indian economy.

* The author is General Manager (Head of Department)-Process at Simon India

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