With less than a week to go for the Union Budget, the government on Wednesday increased the price of petrol and diesel by Rs4 and Rs2 per litre respectively.
The hike can be attributed to the losses being incurred by government-owned oil companies like Indian Oil, to the tune of around Rs6 per litre of petrol and Rs3.62 per litre of diesel, due to a rise in international crude oil prices. The prices of kerosene and cooking gas (LPG) have been left untouched.
Petroleum secretary RS Pandey said the average price of crude oil for India was $70.29 per barrel as of Tuesday, from $58.80 in May and around $40 in December. Despite the fuel price hike, he said oil marketing companies will still recover Rs30,000 crore less than their cost.
Most of the under-recoveries can be attributed to the high rates of taxes in India. Indians, for example, pay around 40% more for petrol and diesel compared to motorists in a non-subsidised market like
the US.
The hike has come in the backdrop of demands, including those from private oil marketing companies, to create a level-playing field by dismantling the system of subsidies.
Private oil marketing companies are unable to compete with state-owned distribution companies which are eligible for subsidies from the government to compensate for their under-recoveries arising from selling petroleum products under cost.
Some market observers see the pre-budget hike, announced after a meeting between Union petroleum minister Murli Deora and prime minister Manmohan Singh, as a precursor to the introduction of a market-linked pricing system for motor fuel. India produces only around 30% of the oil it needs, leading to high exposure to international crude prices.
“This is an indication that we are moving towards linking local fuel prices to the international price, which is desirable as it will help reduce the subsidy burden,” senior economist at ABN AMRO Bank, Gaurav Kapur, told Reuters.
The post-tax under-recovery on petrol and diesel has been narrowed to Rs2 and Rs1.62 per litre respectively, Pandey said, announcing the decision to hike the prices.
“Having regard to the need to provide relief to the poor and the middle classes, the government has decided that there will be no increase in the prices of PDS kerosene and domestic LPG,” the government said in a pressnote. Based on Tuesday’s prices, there is still a subsidy of Rs15.26 per litre of kerosene and Rs92.96 per cylinder of cooking gas, it pointed out.
Crude prices have been on their way up in the last two months, along with a recovery in stocks and overall global financial sentiment. From around $40 in the November to February period, they have been hovering around $70 for the last three weeks. Prices had reached an all-time high of $147.30 in July last year, leading to the last price hike.
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