India's diesel use is rising along with an economy that is estimated to have grown by 7.6 percent in the financial year just ended. Between April and February India's diesel demand surged 10.8 percent.

 

To meet this soaring demand, the state refiners - Indian Oil Corp , Hindustan Petroleum Corp and Bharat Petroleum Corp - last year bought some 12 million tonnes of diesel from the private oil processors.

 

And through the fiscal year that ended on March 31, the private refiners encouraged these purchases by absorbing the central sales tax and coastal freight costs for interstate cargoes shipped from their plants in western Gujarat state.

 

Now the private refiners have asked their state peers to pay the sales tax and coastal freight, potentially making buying from Reliance and Essar costlier than imports, trading sources with knowledge of the matter said.

 

"Instead of getting diesel from their private peers the state refiners have had to go to the market and import," one trader said.

 

Refinery sources said talks were continuing with the private refiners to rework the diesel prices.

 

In the absence of a deal, Indian Oil Corp and Hindustan Petroleum have together booked about 400,000 tonnes of imports of the fuel in April, compared with just 70,000 tonnes in March, and they plan to take similar volumes in the following months if the deadlock isn't broken, sources at the two firms said.

 

Further tightening India's diesel market, according to another oil products trader, is that the "private refiners are maximizing jet-fuel and cutting back diesel production because of better prices."

 

India's private refiners have also boosted their fuel exports. The private firms say the tax increases on diesel and gasoline that safeguard federal revenue instead of passing on the benefits of falling oil prices to customers have made the discounted sales to state-run refiners unattractive.

 

Compared to a 30 per cent decline in crude oil prices since April 2015, retail prices of diesel in Delhi have been raised by about 2 percent.

 

No comment was available from Indian Oil, Hindustan Petroleum, Reliance or Essar, but Bharat Petroleum said it was taking measures to deal with rising demand itself, commissioning an expansion of its Kochi refinery in June.