Finally, diesel price raised by Rs 5/l

Print Story

 

Finally, diesel price raised by Rs 5/l
fe Bureau
Posted online: 2012-09-14 02:30:13+05:30

New DelhiIn a move that might convince rating agencies that the Indian government is turning serious about fiscal consolidation, but will stoke already elevated inflation, the government on Wednesday upped the price of diesel by R5 per litre. While the hike will reduce oil subsidy burden and help rein in the fiscal deficit to some extent, it’s unlikely, say economists, the Reserve Bank of India (RBI) will trim policy rates when it meets on Monday morning.

“An increase in diesel prices in India should avert a credit rating downgrade for the country,” C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told a television channel. Rangarajan added the hike would contribute towards containing fiscal deficit. On the question of cut in policy rates, RBI would take a look at the inflation data for August, C Rangarajan observed.

The price of petrol was left unchanged but the government cut the excise duty on petrol by R5.30 a litre, a move that will mean smaller losses for fuel retailers IOC, HPCL and BPCL. The government also capped the number of subsidised LPG cylinders to six a year per family. The combined impact of the moves on inflation could be close to 100 basis points.

Headline inflation for July came in at 6.9% while consumer inflation came in a shade below 10%.

After the price revision, diesel will cost Rs 47 a litre in the capital. The decisions will help fuel retailers lower under-recoveries by Rs 20,300 crore this fiscal to an estimated Rs 1,67,000 crore, which is nonetheless higher than last year’s number given that the price of crude oil is currently at $116 per barrel.

With the government having taken the politically difficult decision to hike diesel prices, its possible further reforms could be pushed through on Friday when the cabinet meets to review 49% FDI in aviation. Even FDI in multi-brand retail could be considered. Another major decision expected relates to disinvestment in five PSUs.

Department of economic affairs secretary Arvind Mayaram said Wednesday’s measures alone would not be sufficient to contain fiscal deficit at the projected 5.1% of GDP. Mayaram said more steps would be considered and that efforts would be made to keep the fiscal deficit as close as possible to the target.

The government is likely to lose Rs 8,000 crore on account of the excise duty cut on petrol but a part of it may be recouped from the Rs 1.50 a litre increase in excise duty on diesel, the fuel that is consumed four times more than petrol.

The Rs 5 increase in diesel price will help reduce retailers’ revenue loss in selling fuel below cost by Rs 15,000 crore for the rest of the year. Even after the price increase, companies are likely to lose over Rs 1 lakh crore in selling diesel, the petroleum ministry stated after the Cabinet Committee on Political Affairs (CCPA) chaired by Prime Minister Manmohan Singh took the decisions.

The government wanted to reduce the price difference between petrol and diesel in order to discourage consumption of diesel by private vehicle owners who corner the fuel subsidy meant for transportation and agriculture use given for strategic and political objectives. After the price revision, the gap between diesel and petrol in the capital will still be Rs 21.47 a litre. “We have to keep balance in price of diesel and petrol,” said Rangarajan.

The restriction on the number of subsidised LPG cylinders to 6 a year would help in reducing its misuse by hoteliers and restaurateurs who illegally benefit from the subsidy meant for ordinary consumers. Companies are likely to cut their losses from selling LPG by Rs 5,300 crore in the remaining months of this fiscal, the ministry said. An Indian household uses about 6 cylinders a year on an average and hence the cap will not affect the common man, the ministry said. Anyone requiring LPG cylinders over and above the 6 subsidised cylinders allocated, could purchase at market rates. Consumers will get three subsidised cylinders in the remaining part of this year. There is no change in the price of kerosene. “However painful and difficult it may be to increase the price of oil products, an increase is unavoidable,” petroleum and natural gas minister S Jaipal Reddy had said earlier in the week.

Due to losses from selling fuel below cost, oil companies have borrowed heavily. Their total borrowing stands now at Rs.1.58 lakh crore.