Government Bites The Bullet: Allows Oilcos To Hike Petrol Prices By Rs 7.5 A Litre

No sooner did the summer session of the Lok Sabha come to an end on Monday, May 22, 2012, the government gave its so-called informal nod to the domestic oil refiners (OMCs) to go ahead and hike the retail selling prices of petrol and recoup their losses on the unsubsidized and de-controlled fuel.

While a hike in petrol prices was pretty much expected, it was shocking to see the OMCs announce the biggest ever hike of about Rs 7.5 per litre as against market expectations of a hike of Rs 1 to Rs 2 to be taken in a staged manner. With this the retail prices of petrol in Mumbai would stand at Rs 78.57 a litre, while the same in Delhi would stand at Rs 73.18 per litre. This when compared to the retail selling prices of diesel in Mumbai and Delhi, stand about 70-80 per cent more costly. However, there isn’t much to cheer about for all those prospective diesel car buyers, as our industry sources have hinted that the government would now soon be considering a hike in retail prices of diesel in a bid to reduce its spiraling subsidy bill.

While our media counterparts have taken complete efforts to diligently bring out all the political pros and cons of such a move by the centre, we at DSIJ would like to throw some light on its economic implications.

While there is no denying the positive respite that this petrol price hike would bring to the fading financials of the OMCs, from a macro-economic point of view we believe that this would lead to a spike in WPI inflation going forward. Keeping in mind the 1.09 per cent weightage that petrol has in the overall WPI, an 11 per cent hike in retail petrol prices would mean an increase in WPI inflation by 12 basis points.

Though the impact of this steep petrol price hike looks meager on the overall WPI inflation, in an actual scenario, with the rise in price of fuels the transportation cost also increases. The prices of food and vegetables also tend to rise, and hence, the potential impact of the rise in fuel prices could actually be much higher.

Let’s not forget that the OMCs continue to report daily losses on sale of subsidized fuels like diesel, LPG and kerosene, which collectively amount to Rs 509 crore. This coupled with the unsustainably high subsidy burden bill of the government clearly indicates that in order to contain the fiscal deficit the centre may very soon consider a similar hike in the prices of subsidized fuels. This is turn would put more pressure on WPI inflation.

However, despite this we believe that the move to hike the administered prices of fuels and bring them in line with the global prices would augur in laying the foundation for our country’s future economic growth. Though in the near term it’s imminent that inflation would remain sticky above the RBI’s comfort zone, forcing them to reassess their monetary policy decisions, in the long run this will result into a higher GDP growth.