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Fuel prices to go up

Jun 25, 2010

The empowered group of ministers (EGoM) has increased the fuel prices a short while ago. According to initial reports, the price of petrol has been hiked by Rs 3.7 per litre. Going forward, price of the fuel will be market determined. Diesel is up by Rs 2 per litre. Though no yet, it will ultimately be market determined. Or so says the government. Kerosene price goes up by Rs 3 per litre, while LPG goes up by Rs 35 per cylinder. Both kerosene and LPG prices continue to remain under government control. Of course, the oil minister is right in making the move. The economic burden of subsidised fuel was hurting oil marketing companies (OMCs) - Indian Oil, BPCL and HCPL - severely. Currently, they incur a loss of Rs 3.7 per litre of petrol, Rs 3.8 per litre of diesel, Rs 18.8 per litre of Kerosene and Rs 261.9 on every 14.2 kg cylinder of LPG. Every single day, that amounts to losses to the tune of Rs 2.2 bn.

In any case, the practice of the government standing between high crude prices and the Indian consumer is an unhealthy one. It blurs the price signals that consumers receive. Energy is expensive and market prices would shape usage patterns to that reality. Up till now, the government and the OMCs were taking the hit. The consumer had no incentive to rationalise consumption.

A hike in petrol prices may be sustainable. It is regarded as the rich man's fuel. However, diesel, kerosene and LPG are a different matter altogether. Much of India's transport sector runs on diesel. Any hike there would trickle down to the broader economy. Given the worrying inflation situation, the government cannot risk that. Kitchen fuels Kerosene and LPG prices directly affect the common man.

Then there are the political compulsions. Fuel price is a sensitive issue. Opposition parties have already started making statements condemning the move. It is with this apprehension that we expected that diesel prices may be raised by Rs 2 per litre, and not by Rs 3.8 that would make it market-linked. That indeed seems to have happened. Similarly, the hike in domestic LPG rates and kerosene prices is also marginal given the extent of underrecoveries.

In our view, the oil ministry is right in pushing for the deregulation of fuel prices. International crude prices are at a point where the impact of freeing of fuel prices can be absorbed by consumers. It would also help the government shore up its finances. But that's just the economics. Politics is a different ball game. Now that the EGoM has freed fuel prices today, the bigger question is: will they stick to their decision in the face of a political backlash? Also, will they hold their nerve when crude prices start spiking in the future? We doubt it.


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