New Delhi: India plans to free retail fuel prices from government control and link them to global crude oil, said Montek Singh Ahluwalia, deputy chairman of the Planning Commission, indicating that petrol and diesel costs may be cut for the second time in a month.
“The more important thing is to link pricing to what is happening in the international markets, which means we will keep giving the benefit of lower prices to the consumers,” Ahluwalia said in an interview in the Capital .
The country relies on imports for at least 75% of its energy needs and the government sets fuel prices to cushion the poor from inflation. Deregulating prices may help cut revenue losses at Indian Oil Corp. Ltd (IOC), the country’s largest refiner, and its state-owned counterparts, which sell fuel below cost.
The government cut petrol and diesel prices from 6 December after crude oil declined from a record $147.27 (Rs7,128 today) a barrel in New York in July and inflation cooled from a 16-year high. Crude oil prices fell 54% last year, the first annual drop since 2001.
There would be a systemic shift and as and when the prices go up, local prices will also need to be adjusted, Ahluwalia had said on 2 January. “We are pushing. That’s what the government should do and I hope the government will make an announcement to that regard soon,” he had said.
Right push: Montek Singh Ahluwalia, deputy chairman of the Planning Commission, has indicated that petrol and diesel prices may be reduced a second time within a month. They had last been cut on 6 December. Ramesh Pathania / Mint
Crude oil for February delivery rose as much as 5.1% to $48.68 a barrel in after-hours electronic trading on the New York Mercantile Exchange.
Inflation in India eased to a 10-month low of 6.38% in the week to 20 December from 12.91% in August. Declining commodity prices helped the Reserve Bank of India (RBI) to slash interest rates.
Concerns over shrinking profit prompted Standard and Poor’s to cut IOC’s credit rating, citing declining cash flows caused by delays in government compensation for selling fuels below cost.
The rating downgrade came after the government gave Rs22,000 crore of bonds to refiners in December, with IOC getting Rs12,000 crore.
The government is yet to decide on bonds to be given to state-run refiners as compensation for selling fuels below cost in the year to March, oil secretary R.S. Pandey said on Monday.
More stimulus packages
Ahluwalia also said the next government needs to cut interest rates and unveil more stimulus packages to revive an economy growing at its slowest pace in six years.
India holds nationwide elections in April and May that may stymie policymaking at a time the world recession is deepening.
The stance of policy will have to remain concerned with trying to counter the slowdown in the next year, he said.
Ahluwalia had unveiled a plan on 2 January to inject capital into banks and finance companies and allow overseas investors to double purchases of debt in the government’s second stimulus package in a month. On the same day, the central bank cut interest rates for the fourth time in less than three months.
The measures are intended to steer Asia’s third largest economy through the worst quarter of the global slump as exports continue to fall and industrial output extends its first contraction in 15 years, Ahluwalia said.
“The meltdown is so enormous that no matter what you do, it would be difficult to insulate the economy from slowdown,” said D.H. Pai Panandiker, president of RPG Foundation, an economic policy group in New Delhi.
Prime Minister Manmohan Singh’s Congress party is faced with its worst crisis as no political party would like to go to elections with people losing jobs and companies shutting down plants.
Exporters in India have cut about 65,500 jobs as recessions in the US and Europe, the country’s biggest markets, damp overseas demand.
Industrial production fell 0.4% in October, the first decline in 15 years, and exports plunged 9.9% in November after falling for the first time in seven years the previous month. Output at factories and utilities also contracted in December, according to ABN Amro Bank NV.
India isn’t alone in Asia in preparing more measures to revive growth. Singapore will bring its budget forward to January from February and China may announce a second round of policies as early as this month. South Korean and Malaysian leaders had said last week that they will take more steps to spur expansion if necessary.
The first quarter of the year is conceivably going to be the worst, Ahluwalia had said on 2 January.
To revive lending and boost consumer demand at home, RBI governor D. Subbarao has enacted the steepest-ever cuts in interest rates.
Subbarao has slashed the overnight lending rate by 3.5 percentage points and the borrowing rate by 2 percentage points since 20 October, helped by the decline in inflation to a 10-month low. The central bank also reduced the proportion of deposits banks must hold in reserve by 4 percentage points.
“The risks are clearly towards even more aggressive cuts as growth continues to falter and inflation declines rapidly,” said Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai. “We continue to expect growth to slow to 6.7% this fiscal and 5.8% in the next fiscal year.”
Inflation is unlikely to be a problem for at least another six-eight months, freeing policymakers up to revive the economy, Ahluwalia said. Growth in the $1.2 trillion economy is expected to slow to 7% in the year ending 31 March from 9% or more in the previous three years.
A lot will depend upon the fiscal stimulus in the next budget, said Ahluwalia, who joined Singh’s economic team from the International Monetary Fund in 2004. If there is no fiscal stimulus, obviously growth will be lower.
The 2 January policies spurred a rally in the country’s 10-year bonds, pushing yields to record low on Monday. The yield on the 8.24% note due April 2018 fell 14 basis points to 4.93% before trading at 5%. The Bombay Stock Exchange’s benchmark sensitive index had gained on the first two days of 2009 in anticipation of more measures, reversing a record annual slump. On Monday, the Sensex gained 317.38 points, or 3.19%, to 10,275.60.
Overseas stock market investors turned buyers on the first day of the year, reversing a record outflow of funds that sent the rupee to an all-time low. Last year’s sell-off underscored India’s increasing vulnerability to global crises.
Trade represented 35% of India’s gross domestic product (GDP) in the year to 31 March, up from 21% in 1997-98, the year of the Asian financial crisis, according to RBI. Investment accounted for one-third of growth last quarter.
The credit crunch has also delayed financing for the country’s $500 billion spending plan on roads, ports and other infrastructure, though India’s comparatively higher economic growth rates should attract investors back, Ahluwalia said.
The Union government’s first stimulus package on 7 December earmarked Rs20,000 crore, or 0.3% of GDP, for infrastructure spending.
It does look like growth in Asia will be 5% higher compared with the US and Europe, said Ahluwalia.