New Delhi: The government has allowed state-owned oil companies to raise the price of kerosene by 25 paise a litre each month for 10 months to cut the subsidy burden.
On 1 July, kerosene price was hiked by 25 paise a litre, the first increase in rate of the highly subsidised cooking and lighting fuel in five years.
“Petroleum ministry has conveyed to oil marketing companies to raise kerosene price by 25 paise every month till April 2017,” a senior official said.
The first increase has been notified by the oil companies but the rates have so far no reflected in the price of kerosene sold through public distribution system (PDS). It will happen after state governments concur.
Before the price hike, kerosene cost Rs14.96 a litre in Delhi. Its price was last raised by Rs2.64 a litre in June 2011. The previous increase happened in June 2010, when prices went up by Rs3.23 a litre.
Officials said PDS kerosene price of Rs14.96 a litre was at Rs13.12 discount to the fuel’s actual cost of production. Of the discount, the government bears Rs12 a litre and the rest of the bill is footed by upstream oil producers like ONGC.
Kerosene accounted for 41.7% of the total petroleum subsidy of Rs27,571 crore in 2015-16.
The previous UPA government had taken a similar approach of raising rates in small dosage of 50 paise a litre per month to completely eliminate subsidy on diesel. This approached helped the present BJP-led government to deregulate diesel price in October 2014. Petrol price was deregulated in June 2010.
As per Icra estimates, the move to increase retail prices of subsidised kerosene by Rs0.25 a litre per month for 10 months (from July 2016 to April 2017) would lead to overall reduction in gross under-recovery or subsidy by Rs760 crore in current fiscal and Rs2,040 crore in FY18.
“As kerosene under-recoveries beyond Rs12/litre are expected to be borne by PSU upstream companies, the upstream companies would be major beneficiaries of the reform, especially at current or higher level of crude oil prices,” it said.
Subsidy on kerosene was expected to be in the range of Rs9,000-12,500 crore in 2016-17, assuming crude oil price of $40-50 per barrel.
In a report, Bank of America-Merrill Lynch said, “This is a significant pricing reform, long in waiting, and a positive surprise to the markets given the stiff opposition in the past.
Post the price increase, overall FY17/FY18 subsidies will fall by Rs1,100 crore and Rs2,400 crore, respectively.”
Icra said the increased retail prices of subsidised kerosene along with implementation of planned pilot scheme to provide subsidy directly in the bank account of users (Direct Benefit Transfer for Kerosene or DBTK) may also lead to lower diversion of kerosene for unintended purposes.
The DBTK, on a pilot basis in 26 districts, is aimed at reducing the leakage of kerosene, which is widely used for adulteration of auto-fuels (especially diesel).
This is because of material price differential between diesel and kerosene rates. While subsidised kerosene costs Rs14.96 a litre in Delhi, diesel is priced at Rs54.70. Non-subsidised kerosene costs Rs52.82 a litre, which is close to the diesel price.