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Economy Feb 13, 2013

Backfire: diesel dual price actually increasing subsidy burden

By Firstbiz Staff

The government's efforts to save oil marketing companies from the subsidy burden has backfired with commercial consumers tanking up at petrol pumps instead of buying directly from state-run fuel retailers at full market price.

Bulk consumers of diesel such as defence, railways and state transport utilities has dropped 30 percent since 17 January, while retail sales where diesel continues to be subsidies has gone up 12 percent, Business Standard reported today.

Effectively, what was meant to be sold at market price is finding its way back into the government's subsidy bowl thanks to the rise in retail sales.

Reuters

Reuters

This shift to dual pricing, wherein the government allowed OMCs to supply diesel to bulk consumers at market-determined prices, will bleed the government dry if proper regulations to stop bulk diesel users from securing fuel from retail outlets are not put in place. This is because market rates are costlier by Rs 10/ litre.

According to the BS report, Andhra Pradesh, Rajasthan, Tamil Nadu, Gujarat and Karnataka have already seen the migration to retail outlets.

Of the total annual diesel consumption of 70 million tonnes (mt), bulk sales for the industry are more than 11 mt, of which, 3 mt go to defence and railways. The under-realisation is Rs 10.31 per litre. Bulk quantities of diesel are sold directly from the depots of OMCs.

What's worse is that private retailers like Reliance, Essar and Shell are moving in to cash in on this retail business. Earlier, private companies couldn't compete with state-run fuel retailers in diesel sales as they couldn't make money by selling the fuel at the prices state-run companies did.

However, now state-owned companies have been allowed to raise prices in small doses until they can neutralise their losses on selling the product below cost.And this partial decontrol inevitably opens the market up for competition.

According to this BS report, private fuel retailers have already started meeting customers and made offers to cash in on the opportunity. The hike of about 20 per cent in diesel prices for bulk consumers is sure to unleash fierce competition with private players, which only constitute 10 percent of the market, expected to offer discounts to gain market share.

by Firstbiz Staff

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