Another Round Of Petrol And Diesel Price Hike Coupled With Hike In LPG Prices

Just a day earlier, the oil marketing companies in India increased the petrol prices by Rs 1.69 per litre and the diesel prices by 50 paise per litre with effect from July 01, 2014. In addition to this, the government has gone ahead and announced that non-subsidised LPG cylinder prices will now be increased by Rs 16.50 per cylinder. Commenting on the hike in fuel price in the media, India Oil Corporation (IOC) said, “The hike in petrol price has come due to the rise in price of crude oil and forex market and is exclusive of all taxes and levies”.  IOC further added that losses on LPG have risen to Rs 449 per subsidised cylinder from Rs 432.71 in the previous month. The loss was Rs 762.50 in January 2014. The price of non-subsidised LPG, which customers buy after using up their quota of 12 subsidised cylinders, was raised by Rs. 16.50 per 14.2-kg cylinder, the first hike in six months.

But, the question that one needs to ask rather than criticizing the government is, why are these steps needed? If we go in deep and find the core of the matter as to why an additional price hike on petrol and diesel, one needs to assess the global situations or happenings in the gulf region. The unrest in Iraq caused by the seizure of major cities (which houses major refineries) in the country by the militant group Islamic State of Iraq and Syria (ISIS) will impact the supply of the crude oil globally and in turn will impact the import bill of India which is predominantly due to import of crude oil. 
The bulk of Iraq’s oil production comes from three oil fields viz. north Rumaila and south Rumaila in the southern part, and Kirkuk in the north. The southern fields account for approximately three-fourths of the country's total oil production. Exports from Kirkuk have been halted since March 2014. Presently, the ISIS is strong in northern Iraq, so there is no immediate risk to oil exports from the southern fields. But the Indian government wants to have a safe bet here, as they are also in prophesy with the upcoming budget session.

What is the government doing about it?
Passing the international price rise on to the consumer slowly since it wants to move towards market determined price and hopefully keep the rising inflation in check.

Can this price rise be controlled?
Yes and No both. Yes, if government is willing to reduce its revenues from the taxes on petroleum and no, if it decides to pass on the price increase and maintain its tax revenues.

Will the government reduce its tax revenues?
No, since oil revenues form a major chunk of government revenues (35%) and there is no substitute to this revenue in the short run. So in the short term, petrol prices are bound to increase.

Why not price hike in diesel and kerosene?
Food prices are directly tied to diesel prices. Kerosene is mainly used by rural poor. So their ability to absorb the price rise is lesser. Therefore the government chose to pass on the international price rise (without reducing its tax revenues) in petrol first.

Conclusion
To conclude, if one has to pin point certain measures for the government, it has to be on the inflation side coupled with flowing economy and job creation. But the first real test of the NDA would be to present a trustworthy budget not only to the citizens of the nation but to India Inc. as well. There are a lot of ambitions from the industry on the policy paralysis front, speedy clearance of projects and putting up world class infrastructure for performing productive business.