Pros and cons of petrol price hike

The recent hike around Rs 7.5/litre was the steepest hike in petrol price ever and the first increase in more than six months. Previous high was Rs 5 a litre done twice - May 5, 2011 and May 24, 2008. State-owned oil firms incurred a loss of Rs 4,890 crore on petrol sales in the fiscal ending March 31, 2012.

Despite increasing petrol prices sharply, state-owned oil companies currently lose Rs 512 crore per day on selling diesel, domestic LPG and kerosene at lower rates. Diesel is currently sold at a loss of Rs 15.35 a litre, kerosene at Rs 32.98 per litre loss and oil firms lose Rs 479 on sale of every 14.2-kg domestic LPG cylinder.

According to Indian Oil Corporation, every dollar reduction in international oil price translates into a cut in product price by 33 paisa but if rupee depreciates against US dollar by rupee one, it translates into a requirement to raise prices by 77 paisa.

IOC, HPCL and BPCL had together lost Rs 138,541 crore in revenue in 2011-12 on selling fuel products at lower prices. This year they are projected to lose a record Rs 193,880 crore this fiscal.

Despite growing protests over the steep hike in petrol prices, the government has said that it will watch international oil prices and rupee-dollar rate before taking any decision on cutting rates.

Petroleum products and fertilisers form a substantial percentage of the Rs 2.16 trillion (a trillion is one lakh crore) subsidy bill. With global crude prices rising in 2011/12, owing to the political turmoil in West Asia, the oil subsidy has shot up.

Oil companies revise petrol prices on 1st and 16th of every month on the basis of average international oil price and the foreign exchange rate in the previous fortnight.  Despite a fall of rupee against the dollar and a rise in the international crude prices, the oil companies had not hiked petrol prices in nearly six months. The oil companies had on November 4 hiked petrol price by Rs 1.80 per litre but followed it up with two successive cuts in rates - Rs 2.22 a litre on November 16 and Rs 0.78 per litre on December 1.

BJP workers protest against the petrol price hike.

The fiscal deficit ballooned to 5.9 per cent of the gross domestic product (GDP) in 2011-12, up from 4.9 per cent the previous year. The government wants to cut the subsidy bill to less than two per cent of the GDP.