The government may be forced to pay a heavy political price for the decision to raise the price of petrol by Rs 6.28 in one go. It would probably have been better off allowing the price to increase in trickles, particularly because the hike will not make much of a difference to its finances for two reasons. First, because the price of petrol was decontrolled in June 2010 and is therefore not subsidised. Second, and more pertinently, because petrol does not account for more than 10 per cent of the total fuel consumption in India.
"The price hike is not likely to give any relief to the government's swelling fiscal deficit and in mending the economy," says D.S. Rawat, Secretary General of industry lobby, ASSOCHAM.
The big question is over how the government plans to deal with the prices of diesel, liquefied petroleum gas
(LPG) and kerosene, which it controls. According to the Kirit Parikh panel, which looked at the creation of a viable and sustainable system of pricing for petroleum products, 55 per cent of diesel is consumed by the public transport system, which includes railways, trucks and buses. Twelve per cent is consumed by the agriculture sector, in irrigation and cultivation.
The government will not want to disturb either of these sectors for political reasons. The OMCS' total under-recoveries in financial year 2011/12 amounted to Rs 1.4 lakh crore. The under-recoveries work out to Rs 13.64 per litre of diesel, Rs 31 per litre of kerosene and Rs 479 per 14.2 kg cylinder of LPG.
The government has twice postponed a meeting of the empowered group of ministers that will decide on a price hike of these entities, most recently on June 1. The three fuels are not only increasing the government's subsidy bill but are also causing upstream companies, such as Oil and Natural Gas Corporation, Oil India limited and Gas Authority of India Limited to bleed. "It is really troublesome. Had there been no subsidy burden, we would have gone for foreign acquisitions, which is the need of the hour for our energy security," says Sudhir Vasudeva, CMD of ONGC
. The company gave discounts worth Rs 7,351 crore in financial year 2011/12 to the three oil marketing companies.
"It is time the government allows these (controlled) prices also to move to their market-determined level," says a spokesperson for industry lobby Federation of Indian Chambers of Commerce and Industry (FICCI). "The inflationary impact of such an increase happens once for everyone. It can be mitigated by reduction in taxes both by the central and state governments," he adds.
After the hue and cry raised nationwide over the petrol price hike that seems an unlikely possibility.