Fuel retailers consider differential pricing as competition mounts

New Delhi: Established companies in the Indian fuel retail market, including Indian Oil Corp. Ltd (IOC) and Hindustan Petroleum Corp. Ltd (HPCL), are considering a differential pricing option in the wake of increasing competition.
With new entrants such as Mangalore Refinery and Petrochemicals Ltd (MRPL) also considering the same, such a move will benefit consumers, analysts said.
The National Democratic Alliance government deregulated the pricing of diesel in October last year, leading to a surge of interest in this market.
While petrol and diesel prices are deregulated, the prices of domestic cooking gas and kerosene continue to be set by the government.
B. Ashok, chairman of IOC, and Nishi Vasudeva, chairman and managing director of HPCL, confirmed their firm’s strategy while presenting their annual earnings last week.
India’s fuel retail market, with 52,864 outlets, is dominated by state-run companies such as IOC, HPCL and Bharat Petroleum Corp. Ltd.
Private-sector companies such as Essar Oil Ltd and Reliance Industries Ltd shut several retail outlets because they couldn’t match the prices offered at pumps run by their state-controlled rivals.
Experts welcomed the move.
Anil Razdan, a former special secretary in India’s ministry of petroleum and natural gas, said, “Differential pricing can lead to customer choice without compromising quality of service. It can be a small start to create market competition, ultimately leading to better quality of service and price preference.”
While Ashok said his firm would look into differential pricing, Vasudeva said that while pricing was not the only criteria, “one can do differential pricing”.
Petroleum product consumption in India has been growing. According to the ministry of petroleum and natural gas, consumption grew by 3.14% to around 163.17 million metric tonnes in 2014-15. This is expected to rise further with India’s economic growth accelerating.
According to the provisional estimates released by the Central Statistics Office, gross domestic product, or GDP, grew 7.3% in 2014-15.
As part of its fuel retail plans, MRPL has announced its intention of considering a differential pricing option. A unit of Oil and Natural Gas Corp. Ltd, MRPL plans to open 100 outlets for selling petrol and diesel.
Firms have also been considering a dynamic pricing model, wherein consumers pay marginally different rates for petrol and diesel in a city, depending on the location of the outlet and the time of day.
HPCL, in fact, has acquired a “network planning and dynamic pricing tool” from US-based firm MPSI.
According to the petroleum planning and analysis cell, which works under the oil ministry, the consumption of all petroleum products grew 8.7% in April.
Also, sales of passenger vehicles, primary users of petrol and diesel, grew 15.8% to 217,949 in April.
The 2015-16 budget has estimated India’s subsidy bill at `2.43 trillion, around 9% less than the revised estimate of `2.66 trillion for 2014-15.
The petroleum subsidy is estimated at `30,000 crore for 2015-16, 50% less than the revised estimate of `60,270 crore.
The difference between market prices and retail fuel rates—to be borne by oil marketing firms this fiscal year—is estimated at `42,500 crore.
The budget has earmarked `22,000 crore for subsidy on domestic cooking gas and `8,000 crore for kerosene.
Source: Mint; 01 June 2015
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