New Delhi: The EGoM’s decision Friday to de-regulate petrol and raise prices of diesel, kerosene and LPG is a welcome step and signals a move towards recommendations mapped out by the Kirit Parikh Committee. While measures would help reduce fiscal strain, the impact on inflation would be ~100bps.
Petrol prices de-regulated; diesel, LPG, kerosene hiked — The much-awaited Empowered Group of Ministers (EGoM) meeting today culminated in a number of sweeping changes on fuel prices; including:
• Shift to market-driven prices for petrol – this would result in prices rising by 6.7% (an increase of Rs3.5/ltr),
• While diesel would also be de-regulated over time, prices have been raised by 5% (Rs2/ltr) for now,
• Prices of cooking fuels – LPG and kerosene – have been raised by 11.2% (Rs35/cylinder) and 33.3% (Rs3/ltr) respectively; but continue to remain administered. Changes signal a move towards recommendations of the Kirit Parikh Committee and bode well for the fisc.
Also See | Recommendations of the Kirit Parikh Committee (PDF)
Implications for Public Finances
Given this adjustment, assuming current oil prices (US$75/bbl), under-recoveries would reduce from ~Rs770bn to Rs530bn. Our Oil and Gas analyst, Saurabh Handa, believes that while under-recoveries on petrol, which comprise ~10% of total losses, would now be wiped out, oil marketing companies would continue to make losses on diesel, LPG and kerosene (see attached pdf for estimated losses). The impact on public finances would thus depend on how the under-recoveries would be financed. Moreover, while the Kirit Parikh Committee report has sought to address the subsidy formula, as of now there is no clarity on subsidy sharing (see page 2 of pdf).
Impact on Inflation and Rates
Given that the impacted fuels have a wt of 5.44% in the WPI, measures would impact inflation by ~100bps. This could result in inflation averaging ~8% levels in FY11 from 7.4% estimated earlier. With the economy on the road to recovery, as reflected in industrial production gathering steam, non oil imports and bank credit posting a recovery; coupled with inflation remaining sticky, we maintain our view of 75bps of tightening in 2010. We expect the RBI to raise rates in the coming weeks.
A Citigroup India report