Fuel For Thought

Amidst the hullabaloo of the Lok Sabha election results last week, prices of diesel, the common man’s fuel, were quietly hiked by 40 per cent. And for the first time ever, there was no hue and cry, no Opposition slogan-shouting nor public meetings deriding the decision. Many even went so far as to say that the hike wouldn’t even have a major effect on the general price line.

Says Surjit Bhalla, president, Oxus Research: "The diesel price hike will have zero impact on both inflation and growth. After all, globally petroleum prices have ceased to have any major impact on a nation’s economy and I see the same happening in India as well."

For the administration, however, the timing could not have been more perfect. Says Bibek Debroy, director, research, Rajiv Gandhi Institute for Contemporary Studies: "It was extremely important for the government to take such a decision because the timing is very good. In fact, it should have been extended to kerosene as well. And the impact on inflation can be handled easily." That’s because, "overall, the price hike will have less than 1 per cent (0.8) direct impact on the wholesale price index (wpi)", adds Anushree Sinha, senior economist at National Council for Applied Economic Research (ncaer). "But we will definitely have to wait and see the sectoral variations in price."

The decision for hiking the price of diesel was not taken by the cabinet, but by the Oil Coordination Committee (occ), the panel that oversees crude imports by public sector oil companies and manages the all-important balance called the oil pool account. "Our crude oil imports would have suffered and we wouldn’t have been able to pay for the imports if prices were not increased," occ executive director M.S. Ramachandran said while announcing the diesel price hike. He also added: "We will have to seriously consider another price hike if global petroleum prices continue to head north throughout this month." Diesel imports have already touched 4.1 million tonnes this year.

In a single stroke, diesel being a high-consumption item in the country, the price hike from Rs 6.88 a litre to Rs 9.63 a litre, netted the government Rs 6,600 crore. The new retail prices of the economy fuel are Rs 13.91 in Delhi, Rs 14.20 in Calcutta, Rs 16.54 in Mumbai and Rs 15.24 in Chennai. According to Ramachandran, the oil pool deficit, at Rs 5,200 crore now, would have ended up at a whopping Rs 10,000 crore had the prices of diesel not been raised. Thanks to the price hike, the oil pool deficit will hopefully be contained at a more manageable level of Rs 3,200 crore.

The lack of popular interest in the price hike was also because such a decision was expected for quite some time. Diesel prices were last revised in April, marginally from Rs 6.62 a litre to Rs 6.68. Since then, global crude prices have doubled—Gulf crude, a favourite with Indian refineries, is still ruling firm—widening the oil pool deficit and making oil psus see red. For the past few months, they have been pleading with the government for a price hike in petro-products.

Industry circles claim that the other reason behind the decision to raise the price of the mass-consumption fuel was the low margin of the oil bonds (Rs 385 crore) which remained to be redeemed against the original amount of Rs 12,984 crore. occ officials also admitted that diesel being the main fuel for the transport sector in the country, a price hike will definitely have an effect on inflation which had been stagnating around 2 per cent. But they discounted fears in the transport sector that the general preference for diesel cars and other vehicles will go down with the increase in prices. "The effect of the price hike will not be substantial because unleaded petrol, the alternative fuel for cars, is still not available in most parts of the country," says V. Sivaramakrishnan, general manager (marketing), Ford India.

The officials claim that the revised diesel prices, which were fixed after consultation with the finance ministry—despite the outgoing petroleum minister V. Ramamurthy’s initial opposition to what he felt would be an extremely unpopular move—take into account the prevailing trend in international petroleum prices as well as the rupee-dollar exchange rate. The March average price of diesel was $93.38 a tonne, while the average September price of diesel came to $162.10 a tonne.

occ sources also say a price hike for kerosene, the other economy fuel, could be in the offing. Because with this hike in the prices of diesel, the price gap between kerosene and diesel had widened and increased the fears of adulteration of the latter with the former. However, that decision would rest with the new cabinet.