Mumbai: The government has finally bitten the bullet and hiked petrol prices by Rs 7.5 per litre or 11.5% from Thursday, the steepest in last six months. This move is only sentimentally positive as it will continue to strain government finances, unless prices of diesel, kerosene and LPG are hiked.
Fuel subsidies contributed around 0.8% of the GDP in FY12. The recent petrol price hike will not make much difference to the fiscal deficit because - technically petrol prices are de-regulated and are not included in the oil under-recoveries. The current hike will only cushion the losses of oil marketing companies by around Rs 11,000 crore as they had taken a huge hit on their profitability due to rising crude prices coupled with depreciating rupee, according to recent report by Citi.
The government has not hiked prices of diesel, Liquefied Petroleum Gas (LPG) and kerosene which make up the major component of fuel subsidies since June 2011. Oil analyst, Saurabh Handa of Citi estimates total losses of Rs 1.6 trillion losses on diesel (Rs 90,900 crore), LPG (Rs 35,800 crore) and kerosene (Rs 35,700 crore) for 2012-13.
According to the past subsidy sharing mechanism of 45%, the government’s subsidy bill would rise to Rs 73,800 crore in FY13. “Assuming that oil prices remain around $125 per barrel, this will strain the fiscal deficit by 40 basis points to 5.5% of GDP, compared to 5.1% estimated in the budget,” said Rohini Malkani of Citi.
Under-recoveries for diesel stood at Rs 480.5 per cylinder, Rs 31.5 per litre for kerosene and Rs 13.9 per litre for LPG as of first week of May 2012 according to the ministry of petroleum. The government needs to hike prices of diesel by 33.2%, kerosene by 212.8% and LPG by 120.3% in order to erase the losses of oil marketing companies and meet the budgeted target of subsidy bill at 2% of GDP in 2012-13.
All eyes are now on the Empowered Group of Committee meeting scheduled on May 25. Will the government overcome political backlash and revise other fuel prices?