New Delhi, Jan. 17: The Centre today took its first decisive step towards deregulating diesel when it allowed oil refiners to raise prices "from time to time".
Late tonight, the state-owned oil companies decided to raise diesel prices by over 50 paise a litre and lowered petrol prices by over 30 paise. The price of non-subsidised cooking gas has also been raised by over Rs 46, excluding taxes, per cylinder. (See chart)
In order to soften the blow, the government said it had decided to raise the number of subsidised gas cylinders for domestic kitchens to nine from six a year. The benefit will come into effect from April 1.
Petroleum minister Veerappa Moily added that consumers would be entitled to five subsidised cylinders instead of three between September 2012, when the cap was announced, and March 31. The government's subsidy bill will go up by Rs 5,200 crore next year because of the gas cylinder carrot.
The price increases will enable the state-owned oil marketing companies to claw back some of the losses they have had to shoulder by selling diesel ' the fuel that powers freight trains, trucks and industrial plants and machinery ' at a government-mandated price way below their cost of production.
The under-recovery in the diesel price is estimated at Rs 9.60 per litre, which left state-oil companies grappling with an uncovered gap of Rs 73,815 crore on diesel alone. If subsidised kerosene and LPG are added, the under-recoveries swell to Rs 1.25 lakh crore as of Wednesday.
In June 2010, the government had said it had taken an in-principle decision to deregulate diesel prices along with petrol but didn't have the political will at that time to implement the decision. But with the fiscal deficit expected to soar above the budgeted level of 5.1 per cent of GDP this financial year, the government has been left with no choice.
The diesel decision, which was taken at a meeting of the cabinet committee on political affairs, sparked protests from Opposition parties and the threat of demonstrations to force the government to back down.
The move is expected to stoke inflation, which is running at a three-year low of 7.18 per cent. Economists said for each rupee rise in the price of diesel, the inflation rate could go up by 0.13 per cent.
Diesel has a weightage of 4.67 in the Wholesale Price Index (WPI), which is the highest among the 670 commodities that form the index that is used as the gauge for inflation in the economy.
The move to deregulate diesel prices stems from a key recommendation made in the Vijay Kelkar committee report on fiscal consolidation submitted last September.
The report said: "The price of diesel has not been revised in the last 26 months and the under-recovery has increased to Rs 13.50 per litre. Although diesel prices have been deregulated in principle (in June 2010), the prices are still being administered by the government... there is an urgent need for an immediate price increase. The price adjustment should be done in small successive steps and the government should move to complete deregulation of diesel as early as possible."
Soon after the Kelkar report was submitted, the government raised the price of diesel by Rs 5.63 a litre, ending a 26-month price freeze.
The Kelkar committee had said that the policy objective should be to fully deregulate diesel by the start of the 2014-15 financial year. "The aim (must be) to eliminate half of the diesel per unit subsidy by March 31, 2013, and the remaining half over the next fiscal year," the report said.
The decision to raise the price of diesel comes 12 days before the RBI is due to review its monetary policy. Most economists have been anticipating a rate cut of anywhere between 25 and 50 basis points � and are sticking to that forecast for now. If inflation surges again, the dynamics of the rate cuts could change.