Fuel Price Hike Coming Soon

A rebound in global oil prices to 10-month highs may force India into another small yet unpopular fuel price increase next month, dousing any lingering talk of the full-scale liberalisation that refiners yearn for.

The Congress party-led government, more wary than ever of its fragile voter base, has trimmed gasoline and diesel prices twice in the past 12 months, rolling back much of the increase of 2-4 rupees in June 2006, when Indian crude was around $67 a barrel.
But with the Indian crude basket nearing $69 this week, and inflation easing to its lowest in over a year, pressure has built within the industry for a rise that could revive shares of hard-hit state-run refiners such as Indian Oil Corp (IOC) and put a mild dampener on resurgent oil demand growth. "Inflation is under control and oil companies are losing money, it's the right time to increase prices," said Jaspreet Singh at brokerage Prabhudas Lilladhar Pvt Ltd.

Annual wholesale price inflation eased last week to 4.28 per cent, its lowest in 14 months, helping soften political resistance. "Perhaps a decision can be taken in July when first-quarter results for the companies will be out," said Singh.

India, like top Asian oil consumer China, sells fuels such as diesel and gasoline at artificially low prices. It partly compensates state-run refiners with special bonds to cover the mounting cost of crude, totalling nearly $6 billion last year.

The projected revenue loss this fiscal year would come to over $12 billion if global markets remained at current prices and retail prices are not raised, the petroleum ministry estimates.

Since the start of 2003, global crude prices have risen by 150 percent while Indian fuel prices have climbed by only 50-68 percent, with the government reluctant to eliminate subsidies for fear of worsening inflation and sparking public unrest.

The government's need for populist measures was underscored by elections in India's most populous state of Uttar Pradesh in May, when a party championing the lowest castes scored a surprise victory and the ruling party lost ground.

"Politically people do not accept the idea that commercial entities set the price. In India it is not possible," one key minister in the government told media.

While the incremental approach to fuel prices may keep its billion-plus citizens happy, it does little to curb the country's rising domestic oil thirst, which grew 5.9 per cent in the last financial year, increasing its uncomfortable reliance on imports.
Other countries that have taken bolder measures have met with more success in helping rein in consumption. Motor fuel demand from Thailand and Indonesia slumped after the former liberalised diesel prices and the latter roughly doubled prices in 2005.

But India's smaller measures, like those in China and Vietnam, have failed to pack much of a punch. "When prices go up marginally there is no change in consumption, but when prices go up significantly, people will start figuring out ways and means of conserving," said Amrit Pandurangi, executive director at PricewaterHouseCoopers.

Political will was tested earlier this year, when petroleum ministry officials prepared an internal note to allow state-run oil companies to set their own prices of petrol and diesel before the end of the fiscal year next March, sources told media.

But this was shot down before reaching the cabinet as the world's biggest democracy treads more cautiously than fast-growing Communist Vietnam, which effectively turned over control of domestic pump prices to retailers in May.

The government appears equally unwilling to cut back on taxes that are unusually high for Asia, making up about 52 per cent of petrol prices and 31 percent of diesel prices. "The pressure is there for it, even if total liberalisation still remains some way off," said Bishal Thapa, analyst at ICF Consulting in New Delhi.

"There's a population that needs to be taken care of - change is not going to be supersonic." Liberalisation would attract renewed interest from global majors in investing in refineries or retail networks, as India seeks to become a fuel export hub to tap its shipping position between Middle Eastern producers and North Asian consumers.

Royal Dutch Shell has a license for 2,000 fuel stations, yet it has set up just 32 fuel stations. BP walked away from a $3 billion joint venture refinery with Hindustan Petroleum Corp Ltd (HPCL) last year, while Total has yet to finalise a deal to help build an up to $3 billion new plant with the same company.

Liberalisation would also help private retailers such as Reliance Industries Ltd and Essar Oil, who have lost market share. "Providing a level playing field will increase the number of players in the Indian retailing sector, bringing in competition, better efficiency and subsequently more cost reduction," said V Raghuraman, of the Confederation of Indian Industries.