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Possible outcomes for fuel price reforms

Possible outcomes for fuel price reforms
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First Published: Mon, May 10 2010. 04 43 PM IST
Updated: Mon, May 10 2010. 04 43 PM IST
New Delhi: India has been looking for ways to slash costly fuel subsidies for its 1.2 billion citizens since the dismal failure of its 2002 bid to get state-owned refiners to fix prices every two weeks in step with global rates.
A panel of Union cabinet ministers debates any fuel price change, a political hot potato in a country where 410 million people live on less than $1.25 a day, but the panel usually defers to Sonia Gandhi, head of the Congress Party that has led coalition governments since 2004.
Global fuel prices have risen nearly 30% in the last 10 months, while domestic demand has also soared to feed a fast growing economy in which vehicle sales have risen 26.4% to 12.3 million units in the fiscal year ended March.
Rival Asian giant China, with its own billion-plus population, abandoned similar fuel price subsidies from January 2009 to great effect for then-struggling refiners grappling with losses, as Indian state-owned refiners do now.
If India does reform its refined fuel policy during a window stretching from the end of the lawmakers’ budget session last week until Parliament gathers next for its monsoon session in August, here are the possibilities that could play out:
Eliminating Controls
• Lifting subsidies would trigger spikes of up to 15% in retail prices of diesel and petrol -- a political minefield for a government already facing protests over rising prices of food and consumer goods. This option looks even more difficult in the wake of two fuel price hikes since the end of February.
• It could stoke inflation, forcing a tightening of monetary policy. But the government’s fiscal deficit, now projected at 5.5% of the budget for the year ending March 2011, would probably shrink, freeing up capital for other programmes.
• In the fiscal year that ended 31 March, India spent Rs14,950 crore ($3.35 billion), or nearly 1.5% of the total revised government expenditure, on oil subsidies, compared to initial estimates of 31.1 billion.
• Market rates would allow private firms Reliance Industries and Essar Oil, that now mainly export fuel, to consider domestic retail sales.
• Revenue would spike dramatically for retailer Indian Oil Corp as well as Hindustan Petroleum and Bharat Petroleum and upstream firms ONGC, Oil India and GAIL (India).
• Higher retail prices could briefly dampen demand for fuel and vehicles.
• Scrapping government intervention would hit poor consumers, who have no access to electricity and use kerosene for lighting.
Partially Lift Controls
• India may end pricing controls on petrol, viewed as the rich man’s fuel, and gradually remove controls on diesel, which would bring higher inflation but keep the fiscal deficit in check.
• It would help cut the losses of state oil firms, but fuel demand may be hit briefly and draw some opposition from the automobile sector.
• It may spur a change in fuel use, e.g. a large gap between diesel and kerosene prices may see the latter used to adulterate diesel.
• Introduction of a Unique Identity/Smartcards framework may follow to ensure a transparent public distribution system of kerosene and domestic LPG.
Keep Subsidies
• The government may decide to continue with the populist mechanism of subsidising fuel prices but would then face the risk of a ballooning fiscal deficit, and jettison its plan to trim the deficit to 4.1% of GDP by the end of March 2013.
• The finances of the public sector oil marketing companies would get hammered. Projected losses for the firms are estimated at $24.4 billion this year, based on an average crude price of $85 a barrel.
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First Published: Mon, May 10 2010. 04 43 PM IST