The reaction to the increase in petrol prices effected by the three oil marketing companies, six weeks after a similar but a  more steep revision, was predictable.

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Though the major coalition partner - the Trinamool Congress - was the most vocal in its opposition to this move, with its leader, Mamata Banerjee, holding out the threat of walking out of the government - it appears that the Centre intends to stay the course. It is good if it stops pandering to populism, but is it prepared to take this exercise to its logical conclusion?

The increase in petrol price alone won’t suffice .While oil companies are bleeding, the government, too, is burdened with a onerous subsidy bill, even if the upstream companies chip in with a larger financial rescue package. One hopes the government was merely testing the waters before initiating bold measures of its own.

Consider the scenario in which the oil majors are operating. The Indian crude basket has ruled firm with a bullish fervour in evidence and to compound its woes, the depreciation of the rupee via-a vis the dollar, has added to the import costs of crude.In fact, even when there has been a decline in crude prices, this has been more than offset by the depreciation of our currency. For example, the average price of the Indian crude has risen by 30.8% in October 2011 over the year ago, but with the rupee falling to 49.29 per dollar from 44.23 during this period, in terms of our currency, the surge in crude prices has been of the order of 45.2%.

Over the month, while in dollar terms, the Indian crude basket had become cheaper by 2.5% last month, in terms of the rupee, the price has hardened by 0.9%.

This double whammy provides the backdrop to the latest bout of price increase in respect of petrol - a commodity where a deregulated regime is supposedly in place. The reality is that the upward revision in prices is resorted to only after an informal nod by the government and more often than not, the extent of the rise is not in alignment with market conditions.

This explains why the marketing companies have posted under-recoveries to the tune of Rs.2,227 crore in the last fiscal. The more pertinent point is that, despite the latest exercise, the financials of these companies are likely to be in a parlous state without a re-look at the controlled prices of diesel, kerosene and LPG.The petroleum ministry has itself provided a strong case for this. As per the current crude prices, the under-recovery on account of diesel is reckoned at Rs.8.58 per litre, of PDS kerosene at Rs.25.60 per litre and of LPG at Rs.260.50 per cylinder.

Cumulatively, the projected under-recovery of the current year is Rs.1,32,000 crore; in the first half, this figure stood at Rs.64,900 crore. It has also stated that if the crude market remains bullish and the rupee weak, these indicative data may be even higher.On account of rupee depreciation alone, it adds, for every fall of Re 1 augments the under-recovery by a staggering Rs.8,000 crore per year.

In the three months ended October 2011, the rupee has weakened by over Rs.4, implying a considerable spurt in under-recoveries due to this factor alone.

In other words, the hike in petrol prices alone won’t do; this has to be accompanied by a steep increase in the prices of the three regulated petroleum products. Status quo means the worsening of the financial predicament of the oil majors and the accentuation of the fiscal deficit via soaring under-recoveries.

Only in June last, this exercise was undertaken and, in view of the market realities and the change in the fortunes of the rupee, another round is inevitable, based on harsh economic logic.But the political milieu cannot be ignored. Judging by the widespread opposition to the increase in petrol price - a final consumption item and one that caters to relatively well-off segments of the population - the government is unlikely to bite the bullet. Moreover, it has to contend with the raging inflation fever.A hike in diesel with its extensive use in agriculture and transportations and in mass consumption items - kerosene and LPG-  will certainly pose a dilemma because of its inflationary consequences. The best that can be hoped for is that the Centre would act when inflation shows signs of moderating. That is, optimistically, a few months away.

This means that, during the current year, oil majors may have to brace for worsening financials and  the government for a higher fiscal deficit stemming from huge and mounting under-recoveries.A truly deregulated regime would have saved the government from all the knotty issues it is now confronted with, but having missed the bus several times - all the reports by various reports on the subject have been mothballed - the Centre is once again back to square one.