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Fuel price hike to stoke up inflation

The hike in LPG by a massive Rs 50 per cylinder, of diesel by Rs 3 a litre and kerosene by Rs 2 per litre will add to the crushing burden on household budgets already stretched with soaring prices of essential foodstuffs. Headline inflation in May has already crossed the nine per cent mark.

Mail Today Bureau   New Delhi     Last Updated: June 25, 2011  | 15:31 IST

Taking a step that will add to the inflationary pressure on household budgets, the government on Friday raised the price of LPG by a massive Rs 50 per cylinder, of diesel by Rs 3 a litre and kerosene by Rs 2 per litre.

The price of cooking gas in Delhi has now gone up to Rs 395.35 per 14.2 kg cylinder while diesel will cost Rs 40.75 per litre.

Petroleum minister Jaipal Reddy said the increase was "minimal" and the increased price of the three fuels would enable the public sector oil companies to earn "only an additional Rs 21,000 crore".  

Petroleum ministry officials said there was no way to avoid the fuel price hike as the public sector oil companies were making huge losses due to skyrocketing international crude prices - they are hovering at around $110 (Rs 4,944.50) a barrel. The fuel price hike drew a sharp political response from the Opposition and alliance partners alike.

Trinamool Congress chief and West Bengal chief minister Mamata Banerjee said, "We don't support this. The (central) government may have some decisions to take. But we don't support this. This is the time of floods. So, if the prices of fuel are increased frequently, it creates lot of problems."

The BJP also condemned the move. "This government came in the name of aam aadmi. This action and what they were doing in the last seven years are against the interests of common man. They had increased petrol prices recently. Now they increased LPG and even the kerosene prices," BJP spokesperson and MP Shahnawaz Hussain said.

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The Left parties said it was high time to restructure the petroleum taxes. "We condemn the hike in LPG, diesel and kerosene prices. We will launch a nationwide protest against this. The government should immediately restructure the taxes on petroleum products and review the hike," CPM MP Sitaram Yechury said.

The government had in June last year increased the price of diesel by Rs 2 a litre and that of LPG by Rs 35 a cylinder and the poor man's cooking fuel, kerosene, by Rs 3 a litre. Cooking gas has now turned costlier by a massive Rs 85 per cylinder over a year.

The hike in cooking fuel prices will add to the crushing burden on household budgets already stretched with soaring prices of essential foodstuffs. Headline inflation in May has already crossed the nine per cent mark.

The increase in diesel prices will have a cascading effect on prices as truckers will hike rates making it costlier to transport vegetables and industrial raw materials the burden of which will be ultimately have to be borne by the consumer. Reddy said the decision was taken by the empowered group of ministers headed by finance minister P. Chidambaram, which met to consider the alarming situation created by the massive underrecoveries of the oil companies which are projected to touch Rs 1,71,141 crore during 2011-12 in the wake of the high international prices of crude oil.

He said it had been decided to eliminate five per cent customs duty on crude oil and reduce customs duty by five per cent on all petroleum goods. This will enable the oil firms to save Rs 26,000 crore. This apart, excise duty on diesel has been reduced from Rs 4.60 per litre to Rs 2 per litre which will give the oil companies a further relief of Rs 23,000 crore. Reddy tried to cushion the blow to consumers by saying the government was also doing its bit as it would be losing Rs 49,000 crore in revenue.

He said the excise duty on diesel could not be reduced further as the Rs 2 forms part of the crucial road and education cess. The petroleum minister said, "The central government has entirely eliminated customs duty on crude, reduced customs duty on petroleum products and drastically reduced excise duty on diesel. I hope the state governments will also cut state levies to the corresponding extent."

The oil companies backed by the petroleum ministry had been pushing for the hike but the political compulsions of the government had prevented it from going ahead with the step. The government had announced at the time that petrol prices would be market-driven while those of diesel and the two cooking fuels, which are considered politically sensitive items, would be determined by the empowered group of ministers (EGoM).

The Centre had allowed the oil companies to hike the price of petrol in May this year by a Rs 5 per litre, making what it sees as the "rich man's fuel" costlier by 32 per cent in less than a year. It was the tenth increase in the price of petrol and the highest ever in one-go. Petrol now costs Rs 63.37 per litre at Indian Oil Corp (IOC) outlets in Delhi up from Rs 58.37 a litre earlier.

According to the government's official policy the oil companies are free to charge market prices for petrol but in practice the petroleum ministry still exercises control over them as inflation has become a political hot potato. An official said the hike in fuel prices was forced by the fact that oil companies had to take recourse to increased borrowings as they faced a shortage of working capital due to losses on fuel sales.

IOC has seen its borrowing rise by Rs 15,000 crore in the last 45 days - it loses Rs 296 crore per day on fuel sales. Oil firms currently lose Rs 15.44 per litre on diesel, Rs 27.47 per litre on kerosene and Rs 381.14 on the sale of every domestic LPG cylinder.

The upstream oil firms will be asked to bear a part of the underrecoveries burden with the downstream oil marketing companies. In 2008-09, when crude oil shot up to $147 per barrel, the Centre had provided Rs 103,000 crore. The government had issued oil bonds worth Rs 71,292 crore to the three firms to make up for more than two-thirds of the Rs 103,292 crore revenue losses.

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