Courage under fire or bungling again ?

The UPA Government finally bit the bullet on the fuel price hike issue and announced a package comprising a mix of price increases and duty changes to enable the public sector oil marketing companies to combat high crude oil prices. The price of petrol was hiked by Rs5 per litre while diesel turned costlier by Rs3 a litre. The Government also increased domestic LPG price by Rs50 per cylinder. Not surprisingly, there was no hike in kerosene price as it is too sensitive an item to be touched in an election-heavy year. The Government had last increased fuel prices in February, the first time since June 2006. Cooking gas prices had been capped since April 2005. Deora said India's petrol price should ideally have risen by 50%, and diesel and cooking gas prices should have doubled, to bring domestic prices in line with international rates.

Separately, the Finance Ministry announced revision in customs duty and excise duty on crude oil and petroleum products to help cushion the common man from the impact of higher fuel prices. Customs duty on crude oil was removed as against the current rate of 5%. Customs duty on diesel and petrol was cut to 2.5% from 7.5% while on other petroleum products (like ATF and Naphtha) the same was down at 5% versus 10%. Excise duty on petrol and diesel was trimmed by Re1 per litre each. Currently, excise duty on petrol is Rs14.35 per litre while the same on diesel is Rs4.60 a litre.

The fuel price hike will cut under recoveries by Rs211.2bn while Rs226.6bn will come from the duty cuts. OMCs themselves will bear net revenue loss of Rs200bn. The subsidy burden of the upstream oil companies will be Rs450bn. The Government will issue oil bonds worth Rs946bn. Despite the bailout package announced by the Government, there still will be a shortfall of around Rs419-420bn.

The price hike may add between 0.5% and 0.6% to wholesale price inflation, Petroleum Secretary M.S. Srinivasan said. Inflation for the week ended May 24 increased to 8.24%. Inflation for the current week ending June 07 will be released on June 20. Most economists expect inflation to cross 9% then, while the cascading effect of the fuel price hike may even take inflation above 10%. And, with inflation forecast to balloon to a double-digit mark, the RBI is also expected to announce fresh round of monetary tightening, including perhaps a small increase in policy rates.

Mindful of this fact, the Government urged ministries and bureaucrats to cut down on wasteful spending, especially on travel. In a rare move, the Prime Minister addressed the nation, explaining to them the rationale behind the fuel price hike, which he termed as "modest". He also urged the nation to conserve as much energy as possible. "We need to be efficient and economical in our use of energy," Dr. Manmohan Singh said. A substantial burden of high crude oil prices is still being borne by the Government and the public sector oil companies, he said.

Emphasising the precarious condition of the state oil companies, Dr. Singh said they are making a large sacrifice and are under severe stress. Issuing bonds and loading deficits on oil companies is not a permanent solution, he added. "We are only passing on our burden to our children who will have to repay this debt," the Prime Minister said, adding that more corrective measures are needed in future to help the oil companies.

The Prime Minister also called on states to do their bit by cutting sales tax on petroleum products. Several states like West Bengal, Bihar and Maharashtra obliged while others like Kerala were likely to follow suit. Even the BJP urged its chief ministers to trim sales tax on petro products.

But, the transporters and truck operators were in no mood to relent, as they hiked rates by up to 15%. At the same time, the Railways said it will absorb the entire burden of the increase in diesel prices. The reduction in sales tax also prompted oil companies to slash ATF prices by over 4%, but the airlines - already bleeding badly due to record high jet fuel prices - refused to pass on the benefits to consumers. Delhi announced that it will hike domestic LPG prices by only Rs10 per cylinder, while Andhra Pradesh decided to bear the entire burden of the hike in cooking gas prices.