The Hindu Business Line : Govt bites the bullet, hikes petrol, diesel, LPG prices

New Delhi, June 4 Amidst political backlash and further inflationary concerns, the Government on Wednesday announced the highest increase in recent times in the prices of petrol, diesel and domestic liquefied petroleum gas (LPG) effective Wednesday midnight.

The price of petrol has been increased by Rs 5 a litre, diesel by Rs 3 a litre and domestic LPG by Rs 50 a cylinder to partially compensate the public sector oil marketing companies (OMCs) that are suffering heavy revenue losses due to selling petroleum products below the cost price.

The price of kerosene sold under public distribution system, however, remains untouched. Auto fuel prices were last raised in February this year and that of domestic LPG in April 2005.

Duty cuts

This increase in prices of three petroleum products came along with customs and excise duty cuts, higher contribution by upstream oil companies, and oil bonds.

The Government has announced a five per cent cut in customs duty on crude and petrol and diesel. With this, the rate on crude oil will be zero, on petrol and diesel 2.5 per cent and on other products such as aviation turbine fuel five per cent. Besides, excise duty on petrol and diesel will be cut by Re 1 a litre to Rs 13.35 and to Rs 3.60, respectively.

At a press conference after the meeting of Cabinet Committee on Political Affairs, the Petroleum Minister, Mr Murli Deora, said, “The OMCs — Indian Oil Corporation Ltd, Bharat Petroleum Corporation Ltd, and Hindustan Petroleum Corporation Ltd — have been moderating the impact of high international oil prices, which have touched record highs. We were left with no option.”

Shouldering increase

The three OMCs were estimated to suffer a revenue loss of Rs 2,45,305 crore during 2008-09 for selling petroleum products below the cost price, if immediate measures were not taken. “To protect the common man from the inflationary impact of high international oil prices, the Government and OMCs have been absorbing most of the burden. However, due to the relentless increase in international oil prices, it has now become necessary for the consumer, who is an important stake holder, to also shoulder a small part of the increased burden, through a marginal hike in the price of sensitive petroleum products,” he said.

Crude at over $123

Crude prices on Wednesday were holding above $123 a barrel at the New York Mercantile Exchange electronic trading. When petrol and diesel prices were raised in February, the Indian crude oil basket was at $67 a barrel. This crude basket currently averages at $113 a barrel. The Petroleum Secretary, Mr M.S. Srinivasan, said the hike in fuel price would have an inflationary impact of 0.5-0.6 per cent on general prices.

The hike is estimated to bring down the under-recoveries by Rs 21,123 crore, while the Government will forego Rs 22,660 crore by way of duty cuts. Upstream companies like ONGC and Oil India will have to shoulder a higher burden of subsidy at Rs 45,000 crore this fiscal. The OMCs will absorb Rs 20,000 crore of the revenue loss. For the remaining uncovered revenue loss it has been agreed that a suitable provision be made for issuance of oil bonds every quarter according to requirement, Mr Srinivasan said.

On whether the package announced today addressed the liquidity and profitability issues faced by the OMCs, the Indian Oil Corporation Chairman, Mr Sarthak Behuria, said that it addressed the issue.

As regards impact of higher upstream contribution on ONGC, Mr D.K. Sarraf, Director Finance, ONGC, said, “This would be revenue-neutral for ONGC as it has been calculated on current crude price levels because increase in subsidy would be offset by increase in additional revenue from high crude prices. Besides, this announcement has also cleared the uncertainty which we faced till last fiscal on quantum of burden to be shared every quarter.”