Govt finally announces modest hike in fuel prices

The Government finally showed some gumption and announced a marginal hike in retail prices of petrol and diesel while keeping the prices of politically sensitive LPG and Kerosene unchanged. The price of petrol was hiked by Rs2 per litre while that of diesel was increased by Re1 per litre. This was the first upward revision in petrol and diesel prices in the past 20 months. The Government has not increased fuel prices since June 2006, even as crude oil rose 57% in 2007 and surged to US$100 a barrel last month. The Government had actually cut fuel prices in November 2006 and February 2007.

With this, the price of petrol in Delhi rose to Rs45.52/litre from Rs43.52/litre and that of diesel to Rs31.76 a litre from Rs30.48/litre. Fuel prices vary across the country due to different tax structure of states. The state-run oil firms have been suffering heavily owing to the steep increase in crude prices even as local fuel prices have been kept unchanged to avoid a spike in inflation. Oil marketing companies' under-recoveries for the current fiscal year are estimated at Rs718bn. The increase in fuel prices is likely to benefit oil marketing companies by Rs8.4bn.

Meanwhile, Petroleum Secretary M.S. Srinivasan said the contribution of oil bonds towards under-recoveries will go up to 57% from the current level of 43%. Oil marketing companies will get Rs234.6bn of bonds for the year to March 31. They received Rs241.2bn of bonds in the previous fiscal year. Another 33% is currently being borne by public sector oil & gas upstream companies - ONGC and Oil India while the balance is shared by IOC, BPCL and HPCL.

As expected, the Left parties demanded an immediate roll-back, threatening to launch nation-wide protests. The BJP too lashed out on the Government. The matter is expected to be raised in the budget session of the Parliament, which begins on Feb. 25.

Upstream majors ONGC and Oil India will bear a third or Rs240bn. The burden on IOC, BPCL and HPCL will be limited to their last year’s level of 8.4% (Rs61bn) of the total under-realisation. The price hike would cut losses by 1.2%. But, this would provide only partial relief to public sector oil marketing companies. Even with the revised prices, PSU companies will continue to lose Rs7.20/litre on petrol and Rs9.94/litre on diesel.