Next populist move: cut in diesel price?

Next populist move: cut in diesel price?
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First Published: Thu, Feb 26 2009. 12 43 AM IST

Updated: Thu, Feb 26 2009. 12 43 AM IST
New Delhi: The government may not be done yet with its populist measures aimed at reviving the economy and boosting consumer sentiment ahead of elections that are scheduled for May, and may succumb to demand from within for a cut in diesel prices, the third in as many months.
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“The cut (in the price of diesel) was expected to be announced on Tuesday. We are still thinking about it and it may happen shortly,” said a senior cabinet minister, who spoke on condition of anonymity. The minister didn’t comment on why the price cut wasn’t part of the third stimulus package announced by the country’s interim finance minister Pranab Mukherjee on Tuesday.
A cut in diesel prices could see a further reduction in inflation, which was at 3.92% as measured by the rise in wholesale prices for the week ended 7 February. Inflation has fallen on the back of two cuts in fuel prices in the past two months —a Rs5/litre reduction in the price of petrol and a Rs2/litre in that of diesel on 6 December, and then again on 29 January—from 6.56% for the week ended 6 December.
India bought crude at $38.41 (Rs1,913 today) a barrel and $42.53 a barrel at the time of the fuel price cuts on 6 December and 29 January, respectively. The average price at which it has bought crude in February is $43.17 a barrel; for the ongoing fiscal year that will end on 31 March, it is $87.78 per barrel.
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The minister said the announcement on this could come anytime soon, so that the Congress-led United Progressive Alliance government does not violate the Election Commission’s (EC) so-called model code of conduct, which comes into effect once polls are announced. This code, laid down by the constitutional body that oversees elections, prohibits governments from announcing populist measures that could influence voters.
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Apart from having a cascading effect on the prices of a variety of products moved by road, a cut in diesel prices could also benefit farmers, who use the fuel to power tractors that they use for tilling as well as for transport.
A senior official in the ministry of petroleum and natural gas said the issue wasn’t being discussed at the level of the ministry, but at “the highest level” in the government. “It is more of a political issue than an economic one,” added this person, who did not want to be identified. The official said that there was some “over-recovery” in the case of diesel.
“Are small doses of relief being given with an eye on the elections?” asked Rajiv Pratap Rudy, spokesperson of the main Opposition party, the Bharatiya Janata Party. “Anyway, it is too little, too late.”
“I don’t think everything has to be linked to the elections, especially at a time when the economic situation is difficult,” said Manish Tewari, spokesperson for the Congress. “Why shouldn’t we give relief to consumers if we can?”
Prices of petrol, diesel, kerosene and liquified petroleum gas (LPG) that is used for cooking are controlled by the government. These products are sold largely by state-owned oil marketing firms such as Hindustan Petroleum Corp. Ltd, Bharat Petroleum Corp. Ltd and Indian Oil Corp. Ltd. When they sell fuel at prices below what it costs them to procure and refine crude, they make losses, also called under-recoveries. When they do so at prices above, they make profits, also called over-recoveries, although such instances are few and far between.
Recently, the oil firms have started making money on the sale of petrol and diesel. They earn a profit of 3 paise per litre and Rs4.45 per litre, respectively. However, they still lose Rs11.25 per litre on kerosene and Rs74.53 on each domestic LPG cylinder sold.
The companies, however, will end 2008-09 with losses if their under-recoveries are not fully compensated by the government. Their gross under-recoveries in 2008-09 will likely be Rs1.03 trillion. That’s almost 60% lower than the Rs2.45 trillion of losses estimated in June 2008. Global prices of crude had peaked at $147 a barrel in mid-July.
Graphics by Ahmed Raza Khan / Mint
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First Published: Thu, Feb 26 2009. 12 43 AM IST