Govt may avoid diesel hike in 2011 as polls, inflation loom

Govt may avoid diesel hike in 2011 as polls, inflation loom

New Delhi: India is unlikely to risk raising, or even deregulating, diesel prices again this year, allowing demand to expand, as concerns over inflation and state elections eclipse the need to cut spending and keep pace with global oil prices.

Asia’s third-largest oil consumer is on track to use around 5.2% more diesel this year and about the same in 2012, a Reuters survey shows, a little more than half the rate of expected economic growth.

The Congress-led United Progressive Alliance (UPA) government raised diesel prices by around 9% at the end of June for the first time in a year, far below the near 36% gain seen in international prices over the same period, but enough to rouse public protest.

State-run retailers, which lose about Rs5 on every litre of diesel by selling the fuel below cost as part of a government subsidy, had sought a bigger price increase.

“I think the government already pushed the limits," said Mark Freier, an analyst at PFC Energy.

“Considering that inflation is still running high and that the recent price increase already seems to be pretty costly, in terms of its toll on Congress’ political popularity, lost tax revenue... it makes sense that the government shied away from a larger price hike," he said.

Politics, Global Oil Prices

But the fractious coalition government, which deregulated petrol prices in June 2010 and said diesel would follow, is now grappling with inflation heading into double digits.

Annual fuel price inflation has hit 12.85% in June from 12.32% in May and that could soon flow through into the broader economy via higher transport costs.

“I doubt there will be any significant price hikes to diesel anytime this year," said Praveen Kumar, head of south Asia oil and gas consulting at FACTS Global Energy, who also rules out full deregulation while inflation remains high.

Global oil prices could play in the government’s favour, as they are likely to stay below $120 per barrel for Brent through this year, according to all but one respondent in a Reuters poll last month.

“We will see how the global crude situation unfolds ... I would like to believe the average crude price this fiscal (year) should be $100/barrel or maybe marginally higher," said a senior government official. India’s fiscal year ends on 31 March.

“It depends on the domestic inflation situation, on the financial position of the oil marketing companies," the senior government official said. “We can only take a call on that later during the year."

The government faced protests after the last round of price hikes and will want to avoid hurting India’s voters ahead of state elections next year, among them one in Uttar Pradesh, a key political battleground.

Farmers, Transport

The June price rise, which still leaves diesel costs well below those of Asian arch-rival China, was enough only to nibble at demand, which has little downside among cash-strapped truckers and farmers.

“We have limited alternatives. If the government raises diesel prices again, we have to think about using electric water pumps. But we can’t avoid the use of diesel for tractors," said Gupreet Singh, a rice farmer in Punjab.

Road transport for goods in India still far outweighs railways, with some 57% of freight going by road and about 36% by rail, a 2010 McKinsey report said.

“Every time the government raises diesel prices, we are increasing freight charges," said a senior official of the All-India Motor Transport Congress, which represents truckers.

“But we can’t do it all the time, we have to think about competition from the railways ... this way we will lose business."

If global crude prices, which fell slightly after the IEA announced a release of reserve stocks in June, reach a range of $90-$100 per barrel for benchmark Brent, there might be a window early next year before Budget balancing to reflect market realities -- but only if inflation is under control.

Brent oil traded below $118 a barrel on Thursday.

“This is the quandary the government finds itself in. On the one hand, needing to temper inflation and keep consumers happy and on the other, needing to reduce pressure on the state budget and ensure the financial viability of the oil marketing sector," said Tom Grieder, IHS Energy Asia Pacific analyst.

“Diesel price increases usually happen in the first half of the year and it has to do with expectations of inflation ... If the government is pretty confident it can handle inflation, it’s more likely to raise diesel prices to bring them on par with global levels."

However, heading to 2012 state polls through a maze of corruption scandals that have nearly petrified policy, the government could shy away from headline-grabbing price rises at the expense of budget targets and state oil companies’ revenue concerns.

“I think, with the looming elections, and international prices likely to stay strong in the latter half of the year, raising diesel prices will be politically unacceptable," said Victor Shum, consultant with Purvin & Gertz.