Petrol costlier by Rs 3.50; Diesel up by Rs 2; LPG cylinder to cost Rs 35 more

It was all stitched up at a one-on-one meeting between Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee last week. Once the decision was taken, the Minister for Petroleum and Natural Gas Murli Deora was told to fall in line. The time had come, he was told, not just for an increase in petrol and petro-product prices but also for deregulation of these prices.

Deora today announced both the decisions, saying prices of petrol and diesel would become market-driven, in line with the recommendations of a panel headed by former Planning Commission member Kirit Parikh.

An empowered group of ministers led by Finance Minister Pranab Mukherjee agreed to raise diesel prices by Rs 2 a litre for now. The fuel will eventually be freed from state control. Petrol has been freed fully and prices, according to Deora, will be increased by “about Rs 3.50” a litre effective midnight.

The panel also increased prices of liquefied petroleum gas (LPG) by Rs 35 a cylinder and of kerosene by Rs 3 a litre, though both will remain under government control, Petroleum Secretary S Sundareshan told reporters here. Currently, petrol in Delhi costs Rs 47.93 a litre and diesel Rs 38.10.

Today’s move, as it cuts fuel subsidies and limits losses of state-run refiners, adds to bond market expectations that the Reserve Bank of India (RBI) will raise interest rates by at least 50 basis points when it reviews monetary policy next month. It will also push up monthly wholesale price inflation by a 0.9 percentage point, exacerbating headline inflation that stood at a surprisingly high 10.16 per cent in May.

Vijay Kelkar, author of the original report on the dismantling of the Administrative Price Mechanism, told Business Standard he was “delighted” to learn of the government’s announcement. Kelkar had chaired a committee dubbed the “R Group”, R for reform, which recommended opening the petroleum sector to private investment and deregulation of petroleum and petro product pricing.

The market-driven mechanism would mean users would have to pay more whenever international crude oil prices rise and less when they fall. However, the government has not yet decided the periodicity of the change.

Global crude oil prices are now around $77 a barrel.

Shares of refiners gained on expectations that free pricing will help improve profitability and allow private companies to compete with state-run rivals. Private sector companies Reliance Industries, the nation’s biggest refiner, and Essar Oil Ltd mothballed their petrol outlets nationwide after they were unable to match prices offered by state-run rivals as crude oil soared to a record in 2008.

State-run refiners had their biggest gain today in more than a year, even as the benchmark Sensitive Index fell 0.9 per cent. Reliance Industries gained 1 per cent and Essar Oil 6.4 per cent.

Today’s move would bring down the government’s huge subsidy bill and relieve state-owned oil marketing companies of some of the burden they bear by selling fuels much below the market prices. This burden, also called underrecovery, is estimated at Rs 215 crore every day.

Sundareshan said the under- recovery by oil marketing companies for petrol would have been Rs 7,000 crore and for diesel Rs 23,000 crore for the whole year had their prices not been decontrolled.

This is the third time this year that the government has increased prices of petrol and diesel. Kerosene prices were last revised in 2002.

Source: Business Standard

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