Govt decontrols petrol; hikes other fuel prices

In a major policy reform that will help the government improve its financial health but may stoke inflation, a ministerial panel Friday decided to decontrol petrol, and increase prices of diesel, kerosene and cooking gas.

Updated: Jun 26, 2010, 11:19 AM IST

Zeebiz Bureau

New Delhi: In a major policy reform that will help the government improve its financial health but may stoke inflation, a ministerial panel Friday decided to decontrol petrol, and increase prices of diesel, kerosene and cooking gas.

The empowered group of ministers (EGoM) headed by Finance Minister Pranab Mukherjee also decided to eventually free up diesel prices from administrative control, Petroleum Secretary S. Sundareshan told reporters here after the EGoM meeting.

The deregulation will lead to an increase of 3.73 per litre in prices of petrol from Friday midnight. The government has also hiked the prices of diesel by Rs.2 a litre, kerosene by Rs.3 a litre and cooking gas by Rs.35 per cylinder.

State-run oil marketing companies, which now sell fuel products at state-set prices, will gain, as investors showed Friday by cheering on their shares.

Indian Oil closed 10.4 percent higher at Rs 377.30 and ONGC gained 6.4 percent to 1,254 in a market down 1 percent.

Indian Oil, Bharat Petroleum and Hindustan Petroleum suffer revenue losses as they sell auto and cooking fuels at state-set discounted prices to help the government control inflation.

The companies are compensated partly by the government through cash and partly by state-run explorers through discounts on crude oil and products. But they have to bear some of the losses themselves.

"Even after all these changes, underrecoveries for this fiscal year for the [state-run] marketing companies will be Rs 53,000 crore," Sundareshan said.

Despite the deregulation, the government is retaining the right to intervene if global crude prices spike, he added.

`Hike is as minimum as possible`

The politically sensitive decision is likely to stoke inflation which is already high and lead to further rise in prices of essential commodities like vegetables and foodgrains.

"We are fully aware of the sentiments of the people. We are fully aware of some difficulty that it may cause. But, in the larger interest of the Indian economy, it is absolutely essential that the consumers also share the burden of rising prices of crude in the international market," Sunderashan told reporters.

The government`s decision will help more private companies open fuel retailing outlets in India and allow existing players such as Reliance Industries and Royal Dutch Shell PLC expand their retail fuel businesses.
This is the second increase in auto fuel prices this financial, after the last one on February 27.

Diesel is sold at Rs 38.10 per liter in Delhi and petrol at Rs 47.93.

Cooking gas prices have been increased -- for the first time since July 2009. The price of kerosene has been raised for the first hike since April 2002.

"The price hike is as minimum as possible," said Oil Minister Murli Deora. "How long are we going to subsidise Mercedes-Benz cars?"

The EGoM took the decision based on the recommendations of the Kirit Parikh Committee, which had suggested decontrol of fuel prices.

"This price which is likely to be very reasonable, being market-determined, can be easily accommodated by users of petrol in the country," added Sunderashan.

He said the impact of the hike on a petrol-driven four-wheeler would be only an additional Rs.190 per month, while a two-wheeler user may have to spend out an extra Rs.30-35 per month.

"If the eGOM had not done this, the under-recoveries for diesel alone would have been Rs.23,000 crore, which is a burden which the government and upstream oil companies cannot bear," he said.

Stage set for RBI action?

The move will lift some pressure off the government`s subsidy burden, but it will add to the already high inflationary pressure, which could spur the central bank to raise policy rates aggressively.
The Reserve Bank of India could increase rates within two weeks, ahead of its policy review meeting, which is due July 27, said Namrata Padhye, an economist at IDBI Gilts.

Analysts were expecting sustainable policy action from the federal government, rather than just a one-time price hike, because inflation--which rose 10.16% from a year earlier in May, significantly higher than April`s 9.59 percent --is forecast to trend down in the second half of the current financial year through March 2011.

Also, oil prices aren`t expected to rise much for the time being due to high crude oil inventories, showed a survey conducted by Dow Jones Newswires on June 18.

The government wants to reduce its fiscal deficit to 5.5 percent of gross domestic product in the current financial year from a record 6.6 percent in the previous year.

Reforms in fuel prices would help the government lower its fiscal deficit and raise funds via divestment in the sector.

"It [petrol prices] can be increased every day, but we are not moving to that situation," Ashok Sinha, chairman of Bharat Petroleum, told reporters.

"It will be revised every 15-30 days, the individual marketing companies will decide on the price and time for hikes."

With agency inputs