New Delhi: Oil marketing firms got their wish on Wednesday when the government increased the price of fuel by around 10%, but the move met with strong political opposition and economists said that it would push inflation, now at just more than 8% to at least 9%.
The price hike, which will see consumers spending more on petrol, diesel, and cooking gas, came after weeks of deliberation as the ruling Congress-led United Progressive Alliance (UPA) government weighed ways to combat a steep rise in the price of crude.
THE NUMBERS GAME (Graphic)
On Wednesday, the government announced a package comprising the price hikes, a reduction in customs and excise duties on crude, and a fresh issue of oil bonds to help state-owned oil marketing firms cope with the losses they have had to put up with on account of having to sell fuel at prices lower than their cost of production.
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Before the relief package was announced, these losses were estimated at almost Rs2.5 trillion. The proposed bond issue, the price hike, and the duty reductions will reduce this amount to a little more than Rs1 trillion. The government announced a further subsidy to the oil marketing firms from other public sector firms that produce oil. This will reduce their losses to a little more than Rs40,000 crore.
Since state petroleum levies are on an ad valorem basis, some states, such as Maharashtra, West Bengal, Kerala and Andhra Pradesh, have cut sales tax to restrict the retail price rise to the minimum.
In a break from tradition, the cabinet committee on political affairs met on a Wednesday without circulating an agenda note ahead of the meeting, an official who did not wish to be identified said. The cabinet usually meets every Tuesday and Thursday. The rescheduling was partly to accommodate external affairs minister Pranab Mukherjee, part of the UPA’s brain’s trust, who had to leave in the afternoon for China.
Political reaction to the relief package was swift and sharp and economists as well as government maintained that this would push up the inflation rate, which, measured by the wholesale price index, was provisionally estimated at 8.10% for the week ended 17 May, by 0.50-0.60%.
“We continue to expect the headline WPI (Wholesale Price Index) rate to hit double digits in the not too distant future and prove slower to fall. We are looking for WPI rate to average 8.6% in the current fiscal year. CPI (Consumer Price Index) inflation, as measured by the industrial workers rate, will average just more than 9% in 2008-09, largely reflecting the lagged effects of the higher oil (and food) commodity prices feeding through,” Robert Prior-Wandesforde, India economist, HSBC, said.
This is the second round of price increases this year. Since the last round of increases in February, international oil prices have jumped by 25% to around $125 per barrel. The Congress has found it particularly difficult to effect another round of price hikes, not only because its key ally, the Left Front, opposes this, but also because it has suffered a string of electoral defeats, including in the key state of Karnataka.
In fact, the decision to increase fuel prices was preceded by hectic discussions at various levels of the government and the Congress party. A government official who did not wish to be identified said Prime Minister Manmohan Singh himself had chaired four of these meetings. Deputy chairman of the Planning Commission, India’s apex planning body, Montek Singh Ahluwalia also held several discussions with petroleum secretary M.S. Srinivasan and revenue secretary P.V. Bhide.
Since part of the package involves tax giveaways through duty cuts, experts argue this will push up the fiscal deficit, or gross borrowings. This inevitably means more addition to the money supply in the system, and they fear that it would stoke inflationary pressures as more money chases the same amount of goods.
“Global prices have increased steeply in the past year, and the Indian oil basket now costs around $125 per barrel. It has been estimated that a 10% sustained rise, if passed through, can add as much as 1.3% to inflation. The impact of expanding subsidies could contribute an additional 2.5% to fiscal deficit,” said a statement issued by industry lobby Confederation of Indian Industry.
“While the combined effects of the higher interest rates, real income squeeze and weaker global growth will see activity soften this fiscal year, we have revised our GDP growth forecast upwards to 7.5% from 7%,” Prior-Wandesforde added.
The government also indicated that more measures could follow as it seeks to shore up the fiscal health of the oil marketing companies that have been absorbing the subsidy burden or under-recoveries from selling oil products at a concessional price.
Addressing the media on Wednesday, the revenue secretary said the government was considering issuing Rs94,600 crore worth of bonds to oil marketing companies and asked other public sector oil companies to provide Rs65,000 crore as subsidies to them.
Later, the government also constituted a committee headed by former cabinet secretary B.K. Chaturvedi to examine the impact of increase in oil prices between 2004-05 and 2008 on the financial health of all state-owned oil companies. It has been asked to analyse the cash flows and the profitability of all three groups of companies and would also revisit the concept of “under recoveries”. Companies such as India’s largest refiner Indian Oil Corp. Ltd, or IOC, would have had to bear “under-recoveries” of Rs2.45 trillion in 2008-09 on account of selling products below cost.
Paromita Shastri and PTI contributed to this story.