New Delhi: Demand for diesel in India is expected to increase with more farmers using the subsidised fuel for pumping water in the backdrop of the monsoon failing to pick up more than midway through the season.

States are anticipating higher demand for diesel in the face of deficient rainfall. While the overall rain deficit in the country as of Friday was 21%, the worst-affected regions were the north-west (39%), and the central and the south peninsula (21% each).

“We have geared ourselves for adequate diesel supplies due to shortfall in the monsoon. We are expecting diesel consumption to go up," said the head of a government-owned oil marketing company (OMC) requesting anonymity.

Looming crisis: States are anticipating higher demand for diesel in the face of deficient rainfall. Photo by Priyanka Parashar/Mint

An assessment by the ministry of agriculture on the rainfall situation and its impact on agriculture, released on 24 July, had pointed out that the cost of agricultural production is likely to increase “due to more demand of energy for operating water lifting devices in irrigated areas".

However, agriculture secretary Ashish Bahuguna said he does not expect diesel demand to go up. “Power is being diverted from other states to meet the shortfall," he said.

While diesel demand grew from 5.9 mt in April to 6.3 mt in May this fiscal, it dipped to 6.07 mt in June.

Sushil Kumar Modi, deputy chief minister of Bihar, told Mint on Wednesday that the state will demand some sort of diesel subsidy for agriculture purposes to counter the effects of drought. More than 10 districts in Bihar are affected because of less rainfall.

Shortage in rainfall has already affected Mangalore Refinery and Petrochemicals Ltd (MRPL) with the refiner registering a loss of 1,521 crore in the April-June quarter from a profit of 173 crore in the corresponding quarter last fiscal.

“This loss was mainly triggered with sharp reduction in crude and product prices in April and May, steep devaluation of rupee against dollar by almost 8% and lower throughput due to force majeure arising out of stoppage of water supply for about 10 days by district administration," the company said in a statement. This was the first time the refinery has been shut because of water supply being stopped.

As the refinery was closed for 10 days, the crude oil inventory had to be carried forward, resulting in inventory loss of 733 crore. MRPL’s gross turnover was 13,465 crore in the quarter compared with 14,522 crore last year.

“It is a vagary of nature," said Sudhir Vasudeva, chairman and managing director, Oil and Natural Gas Corp. Ltd, of which MRPL is a unit.

Higher demand for diesel will also add to the under-recoveries of OMCs such as Indian Oil Corp. Ltd, Hindustan Petroleum Corp. Ltd and Bharat Petroleum Corp. Ltd. Under-recovery is the revenue loss that OMCs suffer because of having to sell fuel below cost.

The under-recovery posted by the OMCs last fiscal on account of diesel was 81,192 crore compared with 34,706 crore in 2010-11. At current crude oil price levels, state-owned firms are expected to lose around 1.49 trillion for selling fuel below cost in the year to 31 March. The OMCs posted a total under-recovery of 47,000 crore for the first quarter this fiscal from selling diesel, kerosene and domestic liquefied petroleum gas cylinders below cost to keep inflationary pressures under check. Of this, 27,042 crore was on account of diesel sales alone.

“Due to lack of rains, farmers will have to rely more on mechanised alternate forms of irrigation running on diesel and this will increase the cost of production. A drought will push up food prices. It will make it difficult for the government to increase diesel prices as it will add another pressure point to inflation," said D.K. Joshi, principal economist at rating agency Crisil.

With the monsoon failing to pick up more than midway through the season, a worried government has convened the first meeting of an empowered group of ministers (eGoM) early next week.

A petroleum ministry official requesting anonymity said, “It wouldn’t be difficult to meet the diesel demand if it grows. Diesel prices are already subsidized and there is ample diesel supply in the country."

This comes at a time when the government-owned oil marketing companies have revised the structure of “state specific cost" (SSC) to cover irrecoverable taxes levied by the states in a late Tuesday night decision. As a result, prices of petroleum products across India were revised up and down on Wednesday. The price of diesel in seven states such as Assam, Bihar, West Bengal and Maharashtra was increased by 72 paise to 1.95 per litre. Also, this rejig resulted in a reduction in the price of diesel in 10 states such as Karnataka, Goa and Gujarat by 32 paise to 62 paise per litre.

The average price of crude oil in the Indian energy basket in July (till 26 July) was $99.79 per barrel. The current year’s average of crude oil in the Indian energy basket is $105.27 per barrel.

Jacob P. Koshy contributed to this story.