Govt weighs fuel reforms as fiscal woes mount

Govt weighs fuel reforms as fiscal woes mount

New Delhi: Energy firms are focused on India’s moves to review fuel pricing, a long-awaited decision that will cut subsidy bills, revive competition in the transport fuel market and encourage efficient use of energy.

Easing controls, which may raise prices by about 10%, is a political minefield for the government that is facing protests over rising inflation but analysts are optimistic after India’s move last week to ease controls on fertilisers.

Citigroup said in a report that the decision on fertiliser pricing could prompt similar steps for fuel prices.

“The government finally biting the bullet on the fertiliser front bodes well for the upcoming budget," it said.

India’s budget on 26 February may set a roadmap to cut subsidies and ease controls on petrol, diesel, kerosene and cooking gas.

Any move to remove price controls will help Reliance Industries, which operates the world’s biggest refining complex but exports most products as the local market is dominated by state firms that sell cheap fuel, helped by government subsidies.

Reliance had captured about 15% of the retail diesel market in 2006, but it later shut down its pumps as global crude oil prices surged and the private-sector refiner was priced out by state firms.

Good for private firms

“This is obviously good news for the private players such as Reliance, Essar and Shell... This opens up a big demand centre for them," said Sushant Gupta, senior analyst at Wood Mackenzie.

Royal Dutch Shell, which has 72 fuel stations, a tiny blip in India’s network of more than 30,000, is excited about the prospect of petrol and diesel prices being decontrolled.

Reliance and Essar Oil have resumed fuel retailing in recent months but private firms including Shell are unlikely to expand significantly unless government eases price controls.

“We are certainly looking forward. We hope the government will take cognisance of its own initiative announced in last year’s budget," Shell India spokesman Deepak Mukarji said. “If the playing field is levelled, we will go faster."

Free pricing will also help state firms such as Indian Oil Corp., Hindustan Petroleum Corp and Bharat Petroleum Corp but Gupta said their gains may be offset by loss in market share to private retailers.

It will also help curb fuel use in India, which along with China helped crude’s climb to $147 a barrel in 2008. Oil prices, which fell to close to $32 in December 2008, are now about $80 a barrel, still 46% below record levels.

Last year India set up a panel to review fuel pricing and subsidies to help cut fiscal deficit that is likely to rise to a 16-year high of 6.8% of GDP in 2009-10.

The panel has suggested free pricing of gasoline and diesel and an income-linked rise in kerosene and cooking gas prices.


“Given the urgent need to cut fiscal deficit, the budget should aim to reduce subsidies. The process to decontrol petrol and diesel can be introduced immediately," said Amitendu Palit, an economist with the National University of Singapore.

He said India may freeze fuel prices if prices shoot up again, like it did a few years after freeing fuel prices in 2002.

The government adopted a similar strategy for fertilisers, saying it would reimpose price controls if prices jump.

He said India may go slow in raising prices of cooking gas and kerosene to help the common man, but other analysts disagree.

“In the budget the finance minister may look at rationalising the allocation of cooking gas and kerosene to reduce its subsidy bill," said Deepak Pareek, an analyst with Angel Broking.

D.H. Pai Panandikar, an economist, with RPG Foundation said political consensus has yet to emerge on deregulating fuel prices.

Boisterous opposition protests over rising food prices have already shut down parliament on Tuesday, signalling escalating pressure on the government to curb inflation and distracting it from financial reforms.

“Politically it is not desirable to deregulate the fuel prices," Panandikar said. “Alliance partners are already irritated by the recent move on the fertiliser sector and the government has already been taken to task by opposition on rising inflation."