The Manmohan Singh government bravely burned away its dwindling goodwill by hiking diesel prices in the face of huge opposition not only from allied parties, but even within the Congress.
The Cabinet Committee on Political Affairs on Thursday agreed to raise diesel prices by 12 per cent, or Rs 5 per litre, excluding value added tax. It left petrol and PDS kerosene prices unchanged.
Strongly backing the decision to hike diesel price and cap supply of subsidized LPG, the Planning Commission today said the country needs lot of tough decisions, and diesel and petrol prices should be deregulated in phases to cut down deficit.
"(The) diesel price hike is a tough decision and we need lot of tough decisions to get to 8 per cent growth rate," Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters.
The government has restricted the sale of subsidized LPG to six cylinders a year for each household.
They will have to pay market rates for anything they use beyond that.
Diesel will now cost Rs 46.32 per litre in the Capital, and Rs 51.25 in Mumbai.
Reacting to the hike, C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, said the government had taken the right decision, and that fiscal deficit had to be contained. Dr. Rangarajan told a private TV channel soon after the price hike that an increase in diesel prices in India should avert a credit rating downgrade for the country.
The price of diesel, which is a partially deregulated product, had last been hiked by Rs 3 in July 2011.
To offset the loss from not hiking petrol prices this time, the government has reduced the excise duty on petrol by Rs 5.30 per litre.
R.K. Singh, the chairman and managing director at BPCL, said: “This is a very good decision and will certainly help oil companies, and reduce the burden on the government in terms of subsidies. The reduction in the excise duty on petrol is good for us.”
T.K. Ananth Kumar, the chief financial officer at Oil India, said the move was “very good for the oil industry”.
The price hike, seen as politically brave, may just be the first real move by the Centre to curb the fiscal deficit and counter the series of downgrades that the country has faced in the last few months. Credit agency Standard and Poor’s recently threatened to downgrade India’s sovereign rating to junk status.
“To be sure, the fiscal savings from today’s (the diesel price hike) moves are expected to be small. Even assuming that the loss of excise duties on petrol are made up somewhere else by the government, oil company losses after today’s moves are expected to fall by about Rs 21,000 crore, or 0.2 per cent of GDP.
Of this, the government would have absorbed about 50 per cent, so the savings on the Central government budget are even more modest at 0.1 per cent of GDP. Put simply, much more will have to be done to ensure that the fiscal deficit stays closer to 5 per cent, rather than 6 per cent, of GDP,” Sajjid Chinoy, economist (Asia) JPMorgan, said.
“But numbers apart, the symbolism of today’s move is huge. One of the biggest criticisms against the current government has been its inability to take politically tough decisions that are economically sound. Today’s price increase therefore—coming after 15 months and amidst political opposition—was perhaps meant more as a signal to the investor community that the government is serious about some fiscal consolidation and the tide may be turning on the policy front,” he added.
The decision was also lauded by automobile association SIAM, with president S. Sandhiliya saying: "I am very happy that the government has bitten the bullet as it is extremely important, and is in line with the recommendations SIAM has been making."
“The reduction in under-recoveries will be Rs 20,000-22,000 crore… we have to see what impact it has on inflation,” Manishi Raychaudhuri, managing director at BNP Paribas Securities, said.
Economy or politics?
Fuel price hikes and rollbacks go hand in hand. The government eventually concedes to political compulsions.
Mamata Banerjee’s Trinamool Congress, which is part of the UPA government but did not attend today’s CCPA meeting, said it was “shocked by the decision”.
Party leader Kunal Ghosh said: “We are shocked by the decision. We have not been consulted. Trinamool Congress is deeply offended. This price hike will damage the common people. We are not supporting the decision.” Mr Ghosh said his party had learnt about the hike from the “media, not the government”.
The Samajwadi Party, which has bailed the government out on many an occasion but has now indicated that it is set to go its own political way, too has slammed the government, saying it has taken a political decision, waiting for the monsoon session of Parliament to get over before making the announcement.
Both the Trinamool Congress and the Samajwadi Party have made it clear that they will demand a rollback. Another ally, the DMK, too has opposed the hike. In that demand, the Left parties have expectedly joined the Congress’ allies and friends.
The BJP has flayed the government, with senior leader Yashwant Sinha warning of mayhem in the economy. “This is going to cause undue hardship. Prices are not under control. This will lead to overall inflation,” he said. Prices, he said, could have been increased in small doses.
However, this time around, the economic compulsions are equally weighty.
State-run oil marketing companies are losing Rs 550 crore everyday on under-recoveries as a result of higher crude prices in the global markets.
They make a loss of Rs 17/litre on diesel sales, Rs 32.7/litre on kerosene sales, and Rs 347/cylinder on cooking gas sales every day.
Kirit Parikh, Member of Planning Commission, told NDTV Profit that the move “won’t be inflationary in nature”. “Let me try to explain in simple terms—if you don’t increase prices of fuel, you will have large under-recoveries. The fiscal deficit goes up, increasing the money supply. That will increase inflation.
When that happens, you see the RBI will keep interest rates high, and if the interest rates are high, the economy’s growth rate goes down. Some analyses indicate that our growth rate will be around 6-7 per cent if we do nothing over the next three years, but if you bite the bullet and raise prices, the rate could be as high as 9 per cent.”
The government announced today that inflation in August rose to a steep 7.55 per cent, much above the 7 per cent estimated by an NDTV poll of 15 economists. Inflation has been a rising concern for India, and the Reserve Bank of India has held off changing key rates to rein in inflation.
“The direct impact of the diesel price hike will be around 65 basis points on WPI inflation. With transportation costs likely to rise due to the cascading impact of higher diesel prices, we estimate the combined direct and indirect impact at around 100 basis points. WPI inflation for LPG will also rise, but the exact methodology is still unclear. We estimate that total fiscal savings on account of today’s fuel price hike will be just 10 basis points,” Nomura said in a note on the diesel hike before the August inflation numbers were announced.
The government subsidizes the prices of diesel, cooking gas and kerosene to dampen inflation and protect the poor, a popular policy that has put a severe strain on public finances. It has acknowledged earlier that a price hike is essential for curbing fiscal deficit, a pre-condition for reviving growth in Asia's third largest economy.
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