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Fuel prices hiked, not freed - Views on News from Equitymaster
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  • Jul 2, 2009

    Fuel prices hiked, not freed

    There are no signs of the much anticipated deregulation of fuel prices. The government has instead hiked the prices of transport fuels - petrol by Rs 4 per litre and diesel by Rs 2 per litre. However, the prices of domestic LPG and Kerosene have been left unchanged.

    With global crude prices climbing again, this move comes as no surprise. The public sector oil marketing companies (OMCs) - Indian oil, BPCL and HPCL- are unable to recover their input costs. In fact, they were likely to run up an under recovery bill of Rs 700 bn per year. This hike will save them around Rs 130 bn.

    It may be noted that this is a partial measure. The OMCs will still incur under recoveries of Rs 2 per litre on petrol and Rs 1.62 per litre on diesel. Moreover, the prices of Kerosene and LPG have been left untouched as it has a more direct impact on the common man. Under recoveries on these fuels amount to Rs 15 per litre and Rs 93 per cylinder respectively. In fact, as per a leading business daily, Petroleum Secretary R S Pandey himself has called this an 'ad-hoc' measure. We believe the ideal solution is for the government to genuinely deregulate fuel prices and let market forces determine the price levels. Simultaneously, it should provide targeted subsidies to the genuinely needy. To its credit, the government is taking some concrete steps towards this. It has begun the Unique Identity project, to be headed by Mr. Nandan Nilekani.

    However, India's top oil & gas producer ONGC, in its analyst meet, said that it is unrealistic to expect complete deregulation. They should know, after all they foot a part of under recovery bill.

    India outsources to itself
    The cliche of US companies outsourcing their call centre jobs to India is so widespread that there are several Hollywood movies made on this theme. With the US in recession though, it may all be changing. As per the Wall Street Journal, India's call centers are increasingly signing up Indian clients. Although, India outsources business to the tune of US$ 12 a merely 2.4% of the worldwide figure of US$ 500 bn, it is expected to contribute almost 15% of the pie by 2020.

    It may be noted that US outsourcing to India was powered mainly by the relatively lower wages here. Interestingly, the outsourcing originating from within India is based on the difference in wages between urban and rural India. We believe this is a classic case of 'comparative advantage' - the ability of a person to produce a good or service at a lower marginal cost and opportunity cost than another person. Given the cost of living in the Indian metros, this trend is likely to continue.



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