New Delhi: In what will hand the opposition parties added ammunition to attack the United Progressive Alliance in the backdrop of its inability to contain inflation, the government raised diesel, kerosene and domestic cooking gas prices by Rs3 per litre, Rs2 per litre and Rs50 per cylinder, respectively on Friday.
This was accompanied by a reduction in indirect tax levies that will dent the government exchequer by an estimated Rs26,000 crore, making it that much more difficult for finance minister Pranab Mukherjee to adhere to the fiscal deficit limits pronounced in the Union budget earlier this year—especially since the country is unlikely to achieve the 9% growth underlying the budget arithmetic.
The decision was taken by an empowered group of ministers on pricing of petroleum products, headed by Mukherjee.
Effective Friday midnight, diesel will cost around Rs41.15 per litre at pumps of government-owned oil marketing companies (OMCs) such as Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd in Delhi.
Following the revision, diesel, domestic LPG and kerosene will cost Rs41.13 per litre, Rs395.35 per cylinder and Rs14.83 per litre, respectively in Delhi. More expensive fuel will add to the pressure on prices, especially when headline inflation accelerated at 9.06% in May.
Also See | Biting the bullet (Graphic)
In addition, the government withdrew the 5% customs duty on crude oil and reduced import duty on products such as petrol and diesel, bringing it to 2.5%. It also reduced excise duty on diesel from Rs4.60 per litre to Rs2. The increase in fuel prices will reduce under-recoveries—the difference between market price and fuel retail rates—borne by OMCs for 2010-11 by Rs21,000 crore.
“Political problems will always be there and economic problems don’t wait for solutions of so-called political crisis,” oil minister S. Jaipal Reddy said.
Under-recoveries of OMCs are expected to decline from Rs1.71 trillion to Rs1.2 trillion. With lesser liabilities on their balance sheets, OMCs will be able to realize better receipts if they go for any divestment of equity.
“There will only be some impact due to diesel,” Reddy said.
Of the Rs1.71 trillion under-recovery projected for the entire year, diesel alone was expected to account for 42%.
In another development, Reddy ruled out any increase in petrol prices and said: “With the reduction in customs duty, the under-recovery on petrol will be wiped off.”
Graphic by Yogesh Kumar/Mint