Diesel prices will be deregulated in six months with gradual price increases, Oil Minister M Veerappa Moily said on Wednesday.
"In six months, diesel sector will be deregulated," he said at the KPMG Energy Conclave in New Delhi.
State-owned fuel retailers, who control 95 per cent of the petrol pump sales, sell diesel at government-fixed rates, which are way lower than the cost of production.
The government had in January this year allowed them to increase the price by up to 50 paisa a litre every month as part of a plan to gradually remove the subsidies given on the fuel.
"Under-recoveries (losses on diesel sales) had come down to Rs 2.50 because of monthly increases but they soared to Rs 14 as rupee depreciated sharply. Currently, under-recoveries on diesel are at about Rs 9.28 per litre," Moily later told reporters.
He said the monthly increases in rates will continue as planned and there was no plan for a one-time steep hike of Rs 3 or 4 per litre to bridge the gap.
At current rates, it will take 19 months to wipe off all the losses on diesel sales. But Moily is pinning hopes on rupee appreciating and international oil prices cooling down for reducing this time window to 6 months.
The government had in June 2010 freed both petrol and diesel prices from its control. While petrol price have moved in tandem with cost barring occasional exceptions, diesel rates have not been aligned with cost.
Fuel prices were last revised on November 1 when petrol rates were cut by Rs 1.15 a litre on rupee appreciation while diesel price was hiked by 50 paisa. "We are already going in that direction (of deregulating diesel prices). (If) rupee appreciates (against the dollar) and international oil prices drop, we will be in a position to completely deregulate," Moily said.
The minister said he saw no hurdles in assembly elections in few states and ensuing general elections to the monthly revisions in rates.
"Don't worry. UPA-III will come back," he said.
But industry pundits felt increasing the price of diesel during election time will be tricky for the government as higher fuel rates will fan inflation.
Also, diesel is used by farmers, who form a big chunk of voters, to run their tractors and water pumps to irrigate crops.
Earlier speaking at the conference, Moily said India is the fourth largest consumer of energy in the world after China, US and Russia and is expected to become the third largest by 2025.
India consumed 157.057 million tonnes of petroleum products in 2012-13.
"Our biggest challenge is the ever growing gap between the demand and supply resulting in heavy import dependence... Presently we import about 75 per cent of our requirement.’
"The country cannot afford to survive with an import bill of around $160 billion for petroleum and natural gas alone. The main area of import is crude oil, where nearly 80 per cent of the demand will have to be met through imports by the end of the Twelfth Plan period. In case of natural gas, current import dependence is about 30 per cent," he said.