EGoM finally does it...frees petrol prices from state control

The Government finally managed to muster up the courage to do what it has been promising since long - free fuel prices from administrative shackles. After two aborted attempts in recent days, the Empowered Group of Ministers (EGoM) on de-regulation of fuel prices met today in New Delhi. Most members attended the meet, barring Railway Minister Mamata Banerjee. She later termed the move as "anti-people". There will surely be some more clamour from other political parties to rollback the proposed hike in fuel prices. All eyes will be on the monsoon session of parliament, which will no doubt be a stormy affair.



Coming to the crux of the matter, the EGoM decided to free petrol prices from government control while also promising de-control for diesel prices at a later date. For now, diesel prices will go up by Rs2 per litre. In a surprise move, the price of kerosene, which has been left static for over eight years, was also hiked by Rs3 per litre. LPG prices were also increased by Rs35 per cylinder. The revised prices will be effective midnight on Friday.

Kerosene prices have not been hiked since 2002 and currently retail in New Delhi at Rs9.32 a litre. But, in neighbouring countries, kerosene is sold at a much higher rate. Indian Oil Corp (IOC), the country's biggest oil retailer, is currently incurring a daily revenue loss of Rs1.15bn on fuel sales in the domestic market, its chairman told reporters on Wednesday.

The under-recoveries for the state-run oil marketing companies this fiscal will be Rs530bn, Petroleum Secretary S. Sundareshan told reporters after the EGoM meeting. Sundareshan said that the under-recovery on petrol today is around Rs70bn. "Car users will be spending only Rs200 extra per month," he added. Petroleum Minister Murli Deora said the price hike on petrol would be around Rs3.50 per litre.

Shares of upstream and downstream oil companies rallied as market driven petrol prices and the increase in other fuel prices will boost their bottomlines. But, rate sensitive stocks and bond prices declined amid fears that the fuel price hike will force the RBI to go for an intra-cycle rate hike. But, with system liquidity taking a hit in the wake of the 3G-cum-BWA auctions and advance tax outflows, a rate hike may not be such a prudent move at this juncture.

The bold move will shore up Central Government finances, besides helping curb fuel subsidy and rationalising overall consumption of fuel products. At the same time, it would prove to be inflationary in the near term. One has to wait and see what stance the Reserve Bank of India (RBI) takes in the wake the Government announcement. Inflation is already over 10% and if the revision in March figure is anything to go by, the numbers for April and May could also be raised.