Indian Railways, which are likely to post a cash surplus of Rs 31,000 crore (Rs 310 billion) in the current fiscal, should pay market rate for the diesel they consume, as they are one of the largest consumers of subsidised diesel that contributes significantly to the under-realisation losses, state-owned oil companies said in a letter to the petroleum ministry.
If diesel is sold at market rates, Indian Railways, the world's second largest railway network, along with state transport undertakings and the defence forces -- which together consume 60 per cent of bulk sales in India - would have to shell out Rs 15,600 crore (Rs 156 billion) extra every year.
"The railways made a cash surplus of around Rs 25,000 crore (Rs 250 billion) last year. They can definitely afford to pay higher prices," said an official with Bharat Petroleum Corporation Ltd.
Prices of diesel for industrial and commercial users could go up to Rs 57 per litre in Delhi from Rs 34.80 per litre now, if the government approves the dual pricing proposal.
The oil companies, in their proposal for higher diesel prices for industrial users, have said that since 60 per cent of the total industrial sales of diesel come from state-owned utilities, implementing it only for private commercial users would not benefit them much.
Petroleum Secretary RS Pandey had said last week that the government was considering higher diesel prices for bulk users but the railways and state transport units would continue to be charged the subsidised prices.
Oil companies are estimated to lose Rs 1,85,000 crore (Rs 1,850 billion) in the current financial year because of selling petroleum products at below market rates, and half of this is contributed by diesel sales.
Implementing the dual pricing strategy would be difficult as differential rates usually lead to large scale diversion. "But we have to do all we can to reduce our under-realisations and improve our cash flow," said a senior official with Indian Oil Corporation, which sells over half the fuels the country consumes.
If the railways have to pay market rates, they will have to pay an additional Rs 4,500 crore (Rs 45 billion) to take their fuel bill to Rs 13,000 crore (Rs 130 billion) at the current international crude oil prices.
Oil companies will save another Rs 11,500 crore (Rs 115 billion) by selling diesel at market rate to state transport undertakings and defence forces.
The oil marketing companies -- IOC, BPCL and Hindustan Petroleum Corporation -- have proposed to the petroleum ministry that they be allowed to price diesel at market rates to industrial users as the government continues to subsidise prices of fuels for the retail transport sector.
A similar suggestion was also made by a panel headed by Planning Commission member and former Cabinet secretary BK Chaturvedi.
The dual pricing proposal comes at a time when the demand for diesel has grown faster than the capacity to produce the fuel. Demand from the power sector has increased by 152 per cent as prices of alternatives such as fuel oil and naphtha rose with soaring oil prices, but diesel rates continued to be subsidised by the government.
This has resulted in under-realisation on diesel contributing to over half the total under-realisations of the oil marketing companies as they lose around Rs 17 for every litre of the fuel they sell.