Dalal Street Investments

Petrol + Diesel Price Hike – Fill up your tanks

June 23, 2010

The Empowered Group of Ministers (EGoM) plans to re-convene on 25th June 2010 to consider petrol price decontrol, according to media reports. We estimate that petrol prices may be hiked by Rs 4/litre (8%), if decontrolled. We believe this will likely be taken positively by the market as the first step towards eventual decontrol of diesel as well. Diesel under-recovery is at Rs 3.8/l (10 %) currently. We feel diesel prices may be hiked by Rs 2/l, at best.

Projections of Dr Parikh committee – Gasoline and Diesel pricing to be decontrolled totally. If decontrolled, pump prices for both auto-fuels would likely increase ~Rs3-4/litre or 8-10%. Raise kerosene and domestic LPG prices by at least Rs6/l (66%) and Rs100/cyl (36%), respectively. Crude producing PSUs (ONGC, OIL) to gain from transparent sharing formula of cooking oil subsidies above a higher crude price of US$ 60/bbl.

Fuel Price Hike and Inflation – Dr Parikh said,

Inflationary concerns a bogey, as GoI financing under-recoveries through increasing money supply or taxation and cross-subsidies (leading to inefficiencies) is an even more inflationary route. Better targeting of cooking fuel subsidies at low-income groups through a unique identification scheme is necessary, as that would enable full pricing in the open market, transfer of subsidy from Govt to the needy consumer, while simultaneously dis-incentivizing black-marketing by the trader.

Stay tuned for the 25th.


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