The Union government decided to finally bite the bullet and took the politically difficult decision to raise fuel prices, immediately, and predictably, alienating some of its allies ahead of elections to several key states.
Effective midnight Thursday, the price of petrol, which the government artificially keeps at levels unrelated to global market prices of fuel, was raised by Rs2 a litre,while that of diesel ?was raised by Re1.
The effective rates for consumers will vary depending on the local taxes. In New Delhi, for instance, petrol and diesel will be priced at Rs45.52 per litre and Rs31.48 per litre, respectively.
Petrol and diesel prices were last raised in June 2006 when crude oil was at $67 (around Rs3,082 then) a barrel. Crude prices are trading above $90 (Rs3,564) per barrel.
“There was no other option left for the government. It is only a marginal hike,” said Murli Deora, the Union petroleum minister who has long advocated the hike but was consistently turned down by politicians such as Congress president Sonia Gandhi.
When asked about the government’s earlier stand of not increasing prices that will affect the common man, Deora said, “It was the case when the crude prices were $34 per barrel. Today the prices are in the 100s. There was no other option.”
Indeed, senior government officials, who did not wish to be identified, said the finance ministry had refused to reduce customs and excise duties, leaving the government with no option but to increase retail prices. Maintaining that the decision would only marginally bump up the inflation rate, economists endorsed the move as they believe it will also reduce the distortions that were being created because the oil companies were shouldering the cost of subsidizing oil prices.
“The WPI (wholesale price index) will step up, but not by very much since the price hike is less than 5%. It will probably impact WPI between 0.1% to 0.15%,” said Pronab Sen, chief statistician of India.
Similarly, D.K. Joshi, principal economist, Crisil Ltd, said: “This is probably the best they could have done as there are pressure points on inflation emerging particularly from the foodgrains perspective. It is clearly inadequate from the point of view of oil companies and also reducing subsidies. It is definitely inadequate from a rational pricing perspective. Right now, it is important to pass on costs to end-consumers in a phased manner; if prices are not passed on, demand keeps increasing.”
The inflation rate based on WPI was 4.11% for the week ended 26 January.
Even though the inflation rate may increase only marginally, the move to raise oil prices may dampen the chances of any interest rate cuts.
Delivering the keynote address at a conference organized by the Institute of Economic Growth in New Delhi, the Reserve Bank of India deputy governor Rakesh Mohan said, “It is only when there is further secular reduction in inflation and inflation expectations over the medium-term that the Indian interest rates can approach international levels on a consistent basis.”
Mohan’s remarks triggered a rise in yields in the bond market. The yield on the most-traded 7.99% note due July 2017 rose 1 basis point to 7.46% as of 3.25pm in Mumbai, according to the central bank’s trading system. The price fell 0.06, or 6paise per Rs100 face amount, to 103.51. A basis point is 0.01 percentage point.
The principal opposition party, the Bharatiya Janata Party (BJP), opposed the fuel hike and proposed to take the protest to the streets.
The Left parties, an outside ally of the ruling United Progressive Alliance, also opposed the price increase and threatened a nationwide agitation.
The government will roll back prices since the new rates do not significantly reduce oil companies’ under-recoveries, insisted Sitaram Yechury, member, politburo, Communist Party of India (Marxist).
“According to figures given to Left parties by the government one month back, the prices of petroleum, diesel and kerosene oil need to be hiked by Rs16, Rs18 and Rs5 a litre, (respectively,) in order to write off these losses. Because of pressure from us, the hike is much lower,” Yechury said.
“Besides, this government has also rolled back fuel prices once, when international crude rates went down. We hope our strong opposition will have the same reaction.”
However, A.B. Bardhan, general secretary, Communist Party of India (CPI), said, “We have asked all our units, and appeal to the other parties, to hold nationwide protests against the fuel price hike.”
Though the decision to increase oil prices will only marginally reduce the under-recoveries or losses to oil companies, the oil stocks rallied in the stock markets on Thursday.
The Bombay Stock Exchange’s Sensex ended on Thursday at 17,766.63 points, higher by 4.82%. The share price of Indian Oil Corp. Ltd (IOC) closed at Rs536.75, higher by 13.83%, Bharat Petroleum Corp. Ltd (BPCL) ended the day at Rs465 a share, an increase of 10.86%, and Hindustan Petroleum Corp. Ltd’s (HPCL) shares climbed 14.81%, to close at Rs297.60 a share.
Under-recoveries of the oil marketing companies, or OMCs, such as IOC, HPCL and BPCL, were expected to aggregate Rs71,808 crore at the end of March. It will now be lower by Rs840 crore or 1.24%.
However, with the current oil prices ($94.18 per barrel NYMEX), the under-recoveries for 2008-09, which were expected to be around Rs1 trillion, may come down by Rs10,000 crore, or 10%. Of the total under-recoveries, the government will underwrite 57% by issuing oil bonds, the upstream companies such as Oil and Natural Gas Corp. Ltd and Oil India Ltd will contribute 33%, and 8.76% will be absorbed by the oil?marketing companies themselves.
S.V. Narasimhan, director, finance, at IOC, India’s largest oil refining and marketing company, said, “For us any increase in price is welcome. With the current price hike, we will get a Rs410 crore breather for the remaining days of the year. Had this not been the case, we would have to borrow even this amount from the bank. In the next fiscal year it will provide us with a Rs3,300 crore relief. With the recession in the United States, the subprime crisis there, we expect the crude oil prices to come down. We will have to wait and watch.”
However, the Indian Railways is expected to take a hit of around Rs200 crore on account of the hike in fuel prices as it is the biggest consumer of diesel in the country.
The petroleum minister and other Congress party leaders were hopeful that they would be able to convince the allies that there were no other options before the government.
“I appeal to the Left that the navratna status of the oil PSUs (public sector undertakings) should not be tarnished as they are already being bankrupted,” Deora said.
Arguing similarly, Satyavrat Chaturvedi, a spokesperson of the Congress party, said, “Even the aam aadmi (common man) understands that the government cannot avoid a fuel price hike when global prices have soared so high. Please remember that global crude prices were around $58 a barrel when prices were last hiked. In fact, even now domestic prices have not been hiked in line with the global prices. The BJP should remember that it was the NDA (National Democratic Alliance) government that had dismantled the administered price mechanism to align domestic prices with global prices.”
The allies have been opposing the move since elections to state assemblies of Madhya Pradesh, Karnataka, Jammu and Kashmir, Chhattisgarh, Rajasthan, Tripura, Nagaland and Delhi are scheduled for this year.
The government had been trying to buy time on the issue and had even set up a group of ministers (GoM) on fuel prices to forward its suggestions to the government.
However, there were differences within the GoM, which comprised of Deora, defence minister A.K. Antony; finance minister P. Chidambaram; railway minister Lalu Prasad; road transport, highways and shipping minister T.R. Baalu; agriculture minister Sharad Pawar; and was headed by external affairs minister Pranab Mukherjee as reported by Mint on 1 February.
Bloomberg contributed to this story.