New Delhi: Prime Minister Manmohan Singh said on Tuesday the government would end controls on diesel prices, signalling his resolve to push reforms despite strong protests from political allies and opposition parties.
Last week, India allowed market prices for petrol and said diesel may also be freed in the future, to bolster the government’s finances and open up a key sector long dominated by state-run institutions.
Singh’s comments, carried by a government statement, showed his commitment to a policy that would hurt farmers, raise transport costs and stoke double digit inflation.
“With regard to petroleum prices, the fact (is) that petrol prices have been set free; the same is going to be done to the diesel prices...,” the statement quoted Singh as telling reporters while returning from the G-20 nations summit that was held in Toronto.
Market pricing led to a 7.3% rise in the price of petrol, while state-set diesel rates, which were increased by 5% last week, may rise by a similar amount under market forces.
Friday’s price increases would shrink the losses of state-run oil firms by about $13 billion in fiscal 2010-11 to $11.4 billion, according to oil ministry projections.
Reforms in diesel prices would also make the retail market more lucrative for private firms such as Reliance Industries BO, Essar Oil and Royal Dutch Shell as diesel accounts for a third of India’s oil demand, while petrol’s share in barely 10%.
Private firms currently operate less than 2,000 of India’s 40,000 petrol pumps but end of subsidised sales by state firms is encouraging them to expand their retail operations.
Analysts say market prices for diesel in Asia’s third-largest oil consumer may stoke inflation but Singh said the government was concerned that fuel subsidies would hurt the fiscal situation.
Any further rise on inflation would pressure Reserve Bank of India to raise rates before a scheduled review on 27 July.
“What we need is to do the right things (for) our country. The subsidies for the petroleum products have reached a level which is not connected to sound financial management of our economy,” Singh said.
“So it is taking that into account that this decision has been taken to put some burden on the common people, but I think it is manageable.”
Finance minister Pranab Mukherjee said last week’s move to end price controls on petrol and raise prices of diesel, cooking gas and kerosene, was a difficult but necessary decision.
“So, we have taken that risk, there is no doubt. After all, enhancement of oil prices is always an unpleasant decision,” the Business Standard daily quoted Mukherjee as saying.
“But, this unpleasant decision we had to take, there were hardly any options, we had to do it,” he added.
Opposition parties, and members of Singh’s coalition, have slammed last week’s hike as an attack on people’s pockets. The main opposition Bharatiya Janata Party (BJP) is coordinating a general strike with regional parties.
Analysts said Friday’s decision and Singh’s latest statement showed the government was pushing reforms and fiscal discipline.
“Clearly the prime minister has made up his mind to push for fiscal prudence because he is convinced that this is needed to keep the economy in shape,” D H Pai Panandikar, head of private think tank RPG Foundation.
“He is also convinced that if it comes to defending his policies in parliament or going for parliamentary voting he will be able to win it.” Panandikar said political allies of the ruling Congress party may criticize the decision but they would continue to support Singh’s government.
Shares of state-refiners Indian Oil Corp, Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd rose after the Prime Minister’s statement but retreated later in the day.