Diesel demand in India seen immune to price hikes

New Delhi: India's demand for diesel will stay buoyant despite its plan to hike the price of the fuel in small monthly steps, analysts and company officials said on Friday, and the country will keep up the pace of its exports of diesel.

From Thursday, government allowed state fuel retailers to raise prices by up to 0.50 rupees, or one US cent, a litre each month to gradually align them with market rates, and has also freed up the price of gasoil sold to bulk consumers.

The plan aims to prop up public finances without triggering a popular backlash ahead of 2014 elections as India struggles to rein in fuel subsidies and hold down its fiscal deficit.

The country's biggest fuel retailer, Indian Oil Corp, said it now loses revenue of about 9 rupees a litre on the sale of diesel, meaning the hikes will have to run for about a year-and-a-half in order to reflect market realities.

"This is a sensible approach and I don't think this will impact demand because they are going to increase the prices in a gradual way and people will get used to it," said analyst Praveen Kumar at consulting firm FACTS.

Despite paring its economic growth projections for the year, India raised its forecast for diesel consumption ahead of the decision, as the government launches a push to develop the country's infrastructure.

India expects diesel demand to rise 8.3 per cent in the fiscal year ending in March, to 1.43 million barrels per day (bpd), up from a prior forecast of 5.9 per cent.

It exported about 416,000 bpd of diesel in 2011/12, the bulk of that by Reliance Industries, operator of the world's biggest refining complex.

"Demand is driven by broader economic activity in the country," said Kumar, adding that his firm was sticking to its forecast for growth of 4.6 per cent in diesel demand in 2013, to reach 1.48 million bpd.

Demand will not be affected by the decision to raise prices gradually and diesel demand will grow about 8 per cent to 8.5 per cent in the current fiscal year, said M. Nene, head of marketing at state-run Indian Oil Corp.

"Industrial clients in India have no alternative to diesel, while the hike in the retail price is too small to impact demand," said Victor Shum, an oil analyst at IHS Purvin & Gertz, adding that his firm was keeping its forecast for growth of 5 per cent in 2013 to 1.5 million bpd.

Regular price hikes will narrow the gap between diesel and gasoline, whose prices were freed up in 2010, and deter consumers from using it as an alternative to the fuel oil, sold at market rates and sometimes costlier than subsidised diesel.

In New Delhi, the capital, a litre of petrol costs 67.26 rupees, about 41 per cent more than the equivalent volume of diesel, which costs 47.65 rupees a litre.

While analysts hope to see diesel prices freed up as well, India's key government advisory body, the Planning Commission, pointed to political challenges ahead in executing the decision.

"I would say that there is a very clear signal being given that we are going to adjust prices, but there are no iron-clad guarantees in terms of timing," Montek Singh Ahluwalia, deputy chairman of the panel, told a private news channel.