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DIESEL PRICE CUT: After Airtel & Idea, Reliance to target IOCL, HPCL, BPCL?

Reliance Industries, which started giving a discount of Re 1 on every liter of diesel sold through its pumps in January, has now started advertising the offer in Kerala. The discount was first noticed in January in North and West Indian towns.

The move was, at the time, not taken very seriously by players such as Indian Oil Corporation and Hindustan Petroleum Corporation, who felt that it was a response to the discounts offered by state-owned companies to promote electronic payment.

In the aftermath of demonetization, state-owned players including Bharat Petroleum Corporation, had started giving a 0.75% discount when customers paid electronically. That translates to a saving of about 45 paise per liter, and that too in the form of a cash back at a later date.

However, Reliance Industries is offering an instant discount of Re 1 at the pump with no terms and conditions or limits. But the expansion of the offer could pose concerns for the incumbents.

TIME TO WORRY?

The move could set the cat among the pigeons of Indian petroleum retailing business and Reliance could disrupt the fuel retailing market like it disrupted the telecom market.

The state-owned companies, BPCL, IOCL and HPCL, control over 90% of the petrol and diesel retail sales in India.

To prevent competition amongst themselves, they also have identical prices.

This ensures that their profit margins are not hit by competitive pressures, and consumers often choose their pumps purely by looking at the quality of fuel they get.

This is very similar to the Indian telecom market before the entry of Reliance Jio into it.

There were three players — Bharti Airtel, Idea Cellular and Vodafone — and their tariffs, especially for data — was very similar. As a result, consumers chose their provider on non-tariff factors such network coverage and advertising and there was no price-based competition.

MALPRACTICES

Due to the monopolistic nature of the existing petroleum retailing market in India and the high costs of setting up petrol pumps, the sector has seen the rise of malpractices such as adulteration of fuel and rigging of pump equipment.

Moreover, the public sector companies charge a profit margin of around Rs 2 per liter, irrespective of market conditions.

Reliance Industries, which has its own sources of petrol and diesel and is not dependent on state-owned oil companies, is trying to bring forces of competition by cutting the price of fuel.

Even though the price cut is not as high as in telecom — where Reliance Jio’s prices were about 80% cheaper that those of rivals — in petrol and diesel retailing, even a 1.7% cut in price can result in a huge saving.

Many lorry and bus operators, for example, spend lakhs of rupees on fuel per day and a 1-rupee discount can save them thousands of rupees each day.

It remains to be seen how Indian Oil, Bharat Petroleum and Hindustan Petroleum react to the move by Reliance. Reliance owns only around 1,100 pumps, and many of its pumps are non-operational, but each pump can serve a huge customer base, especially those situated on highways and in busy junctions.

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