Government allows OMCs to hike diesel prices

January 18, 2013: As of midnight, the government has initiated a ‘soft’ decontrol of diesel prices by authorizing state-run oil marketing companies (OMCs) to hike diesel prices in small amounts over a period of time, a move which has been expected since a long time. Prices stand increased by 0.45 paise per litre (excluding VAT) of diesel fuel. The new price of diesel fuel in Delhi is Rs 47.65 per litre, Rs 53.71 in Mumbai, Rs 51.51 in Kolkata and Rs 50.68 in Chennai.

As per a statement issued by IndianOil Corporation, “As a result of the above, the under-recoveries on HSD, both bulk and retail, shall decrease by approximately Rs 3,400 crore till March 2013. Based on the current prices and volumes, the decrease in the under-recoveries on annual basis on HSD shall be approximately Rs 15,000 crore for OMCs as a whole.”

The move to decontrol diesel prices is likely to have an effect on market dynamics, albeit gradually. The diesel prices hikes, when implemented in stages, will help reduce the imbalance between diesel and petrol. It has been over two-and-half-years ago since the government linked the price of petrol to international prices. Since then, prices have gone up by at least 12 times and today, the differential between both fuels is around Rs 21 a litre.

Following the decontrol of petrol prices in June 2010, the passenger car industry saw a massive shift in consumer preference from petrol-powered cars to diesel-driven ones, resulting in huge demand for diesel cars. The extent of this demand can be seen from the fact the contribution of diesel cars to total car sales surged to 58 percent in 2012 from 28 percent in 2010.

Given this trend, OEMs too expanded or announced new diesel engine manufacturing operations. While Ford India expanded its diesel engine capacity by 80,000 units, both Maruti Suzuki India and Hyundai Motor India have announced plans to increase their diesel powerplant capacities, mainly to cater to burgeoning demand.