India Frees Gasoline, Diesel Prices to Help Cut Expenditure

June 26 (Bloomberg) -- India decided to free prices of gasoline and diesel, saying they would be market driven in line with a panel’s recommendations, to cut fuel subsidies and limit losses of state-run refiners including Indian Oil Corp.

A panel led by Finance Minister Pranab Mukherjee also agreed to increase prices of cooking gas and kerosene, which will continue to be under government control, Oil Secretary S. Sundareshan told reporters in New Delhi yesterday. Diesel prices are being raised by two rupees a liter for now and the fuel will eventually be freed from state control, he said.

Gasoline has been freed fully and prices will be increased by “about 3 1/2 rupees” a liter, Oil Minister Murli Deora said.

Prospects of improved profitability from free pricing and expanded fuel retailing by private refiners boosted their shares. A lower fuel subsidy bill may help Prime Minister Manmohan Singh reduce the fiscal deficit to 5.5 percent of gross domestic product this financial year from an estimated 6.9 percent last year.

“This is a game-changer for the sector,” said Saeed Jaffery, a Mumbai-based analyst with Ambit Capital Pvt. “This should also help Reliance Industries and Essar Oil to roll out their retail networks again.”

Non-state companies including Reliance Industries Ltd., the nation’s biggest refiner, and Essar Oil Ltd. mothballed their gasoline outlets nationwide after they were unable to match prices offered by state-run rivals as crude soared to a record in 2008.

Shares Surge

State-run refiners had their biggest gain in more than a year. Indian Oil Corp., the nation’s biggest state-owned refiner, soared 11 percent, the most since May 21, 2009, to 377.95 rupees in Mumbai yesterday. Bharat Petroleum Corp. gained 13 percent and Hindustan Petroleum Corp. surged 14 percent, both rising the most since May 18, 2009. The benchmark Sensitive Index fell 0.9 percent.

“Oil and gas companies, which have been pretty undervalued, are now poised to make a comeback,” said Mahesh Patil, who manages about $3 billion in equities at Birla Sun Life Asset Management Co. in Mumbai. “We will see their true potential now. The market will start to reward them.”

State-owned refiners can start considering selling shares as their stocks may be fully valued, Sundareshan said. The decision may also help non-state refiners to open their retail outlets, he said.

Private Refiners

Essar Oil, which owns 1,300 retail fuel stations in India, said the consumer will benefit through competitive pricing and better services offered at outlets.

“We already have in place plans to increase significantly the number of retail fuel outlets that we have,” Naresh Nayyar, chief executive officer of Essar Oil’s parent company Essar Energy Ltd., said in a statement. “This decision creates a level playing field between government-owned and private-sector fuel retailers.”

Reliance Industries gained 1 percent to 1,062.95 rupees and Essar Oil climbed 6.4 percent to 137.65 rupees yesterday.

The increase in gasoline and diesel prices is the third this year. The government raised auto fuel prices for the first time on Feb. 27 after Mukherjee imposed import duty and excise tax on crude oil and refined products. State refiners were then allowed to increase rates on April 1 after they started selling Euro IV-compliant motor fuels.

The current price of gasoline in Delhi is 47.93 rupees a liter, according to Indian Oil’s website. Diesel costs 38.10 rupees a liter.

Panel Recommendations

A government-appointed panel headed by Kirit Parikh, a former member of the nation’s Planning Commission, recommended in February that India free gasoline and diesel prices from state control and increase kerosene and cooking gas rates. India more than doubled prices of natural gas sold by state-run Oil & Natural Gas Corp. and Oil India Ltd. last month.

Deora wrote to state chief ministers seeking a reduction and rationalization of local taxes on gasoline and diesel, the oil ministry said in an e-mailed statement June 21. The government is committed to supplying affordable oil products, Deora said.

Crude for August delivery increased $2.35 to settle at $78.86 a barrel on the New York Mercantile Exchange yesterday. It was the biggest gain since June 9. The contract increased 0.8 percent this week.

Inflation, Harvest

The increase in fuel prices may spur inflation by 130 basis points, JPMorgan Chase & Co. economist Jahangir Aziz said in a phone interview.

India’s benchmark wholesale-price inflation unexpectedly accelerated 10.16 percent in May from a year earlier.

The country’s inflation rate may halve to about 5 percent by March as better harvests this year are expected to cut farm prices, Mukherjee said at the Institute of International Finance in Washington June 21. The government expects agriculture output to rise after the weather office predicted the June-September monsoon rains would be normal.

The government’s decision may also benefit Oil & Natural Gas Corp. and other state-run explorers, which partly compensated Indian state refiners for selling fuels at fixed prices by selling crude to them at a discount. ONGC shares rose 6.2 percent to 1,263.40 rupees, the highest level since Jan. 15, 2008.

Fuel Subsidies

The government hasn’t decided how frequently gasoline prices may be changed. State refiners won’t revise rates at fixed intervals to prevent hoarding, Sundareshan said.

Bharat Petroleum may change gasoline prices every 15 days or monthly, Chairman Ashok Sinha told reporters in New Delhi.

Fuel subsidies given by the government to state refiners fell to 260 billion rupees ($5.5 billion) in the year ended March 31 as oil declined from a record in July 2008. The refiners received 713 billion rupees in bonds as compensation a year earlier, according to the government.

India last freed prices of oil products from government control in April 2002, giving state-owned refiners freedom to set retail prices twice a month. That stopped in December 2003 after the then Bharatiya Janata Party-led government barred them from raising rates before the May 2004 elections.