NEW DELHI: Feb.4: After food items, it is the turn of motor fuels to burn a bigger hole in your pocket. An increase of at least Rs 3 a litre in petrol and Re 1 in diesel prices appears very likely around the budget as the government nears the end of its capacity to extend a financial lifeline to state-run oilmarketers.
A panel under former Planning Commisson member Kirit Parikh, set up to review the petro pricing regime, set the stage on Wednesday for the upward revision recommending removal of government control over petrol and diesel prices, raising cooking gas price by Rs 100 per cylinder and kerosene by Rs 6 a litre.
Government is unlikely to muster courage to fully accept the recommendations on kitchen fuels, but a rise in motor fuel prices looks unavoidable. Besides, there is also the possibility of a small hike in cooking gas prices in phases.
Oil minister Murli Deora said he would take the Parikh report to the Cabinet in a week, amid indications of a convergence of view in the government that a hike could not be put off any more. "Very likely," said sources in the finance ministry when asked about the hike.
Two similar committees before the Parikh panel — under former RBI governor C Rangarajan and former cabinet secretary and Plan panel member B K Chaturvedi — too had suggested freeing motor fuel prices. But unlike in the past, there are three key factors that could force the government to bite the bullet this time — perhaps with the precaution of a calibrated cap on the extent oil firms can raise prices of diesel since this is a key input for farmers.
The main factor forcing the government’s hands is the rising deficit and cost of economic stimulus, farm support prices besides social sector spendings. The finance ministry has put its foot down on giving any more dole. More so, when its hope of a significant cash flow has been dashed now that the auction of 3G radio spectrum is not happening this fiscal. And whatever money is to flow in from follow-on sell-off in NTPC will go towards bridging the deficit. All other offerings will happen in the next fiscal. This leaves little scope for subsidising motor fuels.
Politically speaking, this is the right time to administer the bitter pill, as state elections are months away. Bihar elections are scheduled only in November. The window can be used for letting any political storm over a hike blow over.
Still, there are concerns of an adverse fallout, especially at a time when food inflation remains high. Government, however, is taking solace from the calculation that a hike of Rs 3 a litre for petrol and Re 1 a litre for diesel will have only a marginal impact on overall inflation.
Petroleum ministry paper prepared for the Cabinet seeks to assuage the concern by projecting two scenarios — one in which price of petrol and diesel is raised by Re 1 a litre each and the other in which only petrol prices are raised by Rs 3 a litre. Taking November inflation of 4.78% as the benchmark, the first scenario shows inflation rising marginally to 4.93%. In the second scenario, the inflation rises even less to 4.85%.
This is because petro products have a combined weightage of 6.99% in the overall inflation basket. Out of this, petrol accounts for 0.89% and diesel 2.025 weigtage. Besides, taking November as benchmark, overall inflation shows a decline of 3.70 basis points to 4.78 from 8.48 in November 2008. For mineral oils as a group, the decrease is 10.95%; while for diesel it is 19.67 basis points and for petrol 28.10 basis points as crude prices cooled off from their historic 2007 highs.
As a consolation, international crude prices are moderately high. And the gap between present pump prices and global crude is not too wide. Crude is projected at $70-80 levels in 2010-11. That means if the government raises prices now, it may not have to revise them upwards again at a time state polls kick in.
At present global oil prices, deregulation will result in an increase of Rs 4.72 a litre in petrol and Rs 2.33 per litre in diesel prices. Similarly, kerosene is sold at a discount of Rs 18.06 a litre and cooking gas cylinders at Rs 287.59.