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Diesel Price Hike by 5/Litre, LPG cylinders cut to six a year:

Diesel Price Hike in India 

The Manmohan Singh government has bitten the subsidy bullet on fuel prices in the face of huge opposition not only from allied parties, but even within the Congress. The Cabinet Committee on Political Affairs on Thursday approved a Rs. 5 hike in the price of diesel. This excludes value added tax. Mulayam Singh Yadav’s party has already demanded a rollback.
The price of diesel, which is partially deregulated product, had last been hiked by Rs. 3 in July last year. The Rs. 5 increase does not include value added tax. Diesel will now cost Rs. 46.32 per litre in the Capital, and Rs. 51.25 in Mumbai.

The prices of petrol, LPG and PDS kerosene have been left unchanged, but the government has restricted the sale of subsidized LPG to six cylinders a year for each household. They will have to market rates for anything they use beyond that. To offset the loss from not hiking petrol prices at this time, it has proposed a reduction in excise duty on petrol by Rs. 5.30 per litre.

Reacting to the hike, C. Rangarajan, chairman of the Prime Minister's Economic Advisory Council, said the government had taken the right decision, and that fiscal deficit had to be contained. “An increase in diesel prices in India should avert a credit rating downgrade for the country.”

Diesel Price Hike in India Chart

The decision was also lauded by automobile association SIAM, with president S. Sandhiliya saying the hike was a " very good decision and I am happy very happy that the government has bitten the bullet as it is extremely important, and is in line with the recommendations".

The BJP has slammed the government, with senior leader Yashwant Sinha warned of mayhem in the economy. “This is going to cause undue hardship. Prices are not under control. This will lead to overall inflation,” he said. Prices, he said, could have been increased in small doses.

Kamal Farooqui of the Samajwadi Party too criticized the UPA government, saying it had taken a political decision, waiting for the monsoon session of parliament to get over. The jump is too big. We will demand a rollback. Definitely, we will ask for some consideration to be given, we are concerned,” he said.

The government subsidises the prices of diesel, cooking gas and kerosene to dampen inflation and protect the poor, a popular policy that has put a severe strain on public finances.

The government has acknowledged earlier that a price hike is essential for curbing fiscal deficit, a pre-condition for reviving growth in Asia's third largest economy. A price increase will also aggravate inflation, as costs, such as road freight rates, will rise.

State-run oil marketing companies are losing Rs. 550 crore everyday on under-recoveries as a result of higher crude prices in the global markets. They make a loss of Rs. 17/litre on diesel sales, Rs. 32.7/litre on kerosene sales, and Rs. 347/cylinder on cooking gas sales every day.

The move was welcomed by oil companies. R.K. Singh, CMD at Bharat Petroleum, said: “This is a very good decision, and will certainly help oil companies and reduce the burden on the government in terms of subsidies. The reduction in the excise duty on petrol is good for us.”

Diesel Price Hike in India Graph

"This is a welcome move and is very good for the oil industry," Oil India CFO T.K. Ananth Kumar said.

R.S. Butola, chairman of Indian Oil Corporation Ltd told NDTV that the company is committed to cutting petrol prices whenever possible. “Diesel accounts for 53 per cent of total subsidies. Oil companies are running a deficit of Rs. 6,000 crore every month. By reducing the excise duty on petrol, we have narrowed the gap between the prices of petrol and diesel. A narrow margin will be good for economy. If global petrol prices fall, we will pass on the benefits,” he added.

The increase in diesel prices will aid in trimming the fiscal deficit and improve economy's credit rating, PMEAC chairman C Rangarajan, told CNBC-TV18 on Thursday. The government raised the price of heavily subsidised diesel in a politically risky move to rein-in fiscal deficit and fight the threat of being the first in the BRICS group of emerging economies to be downgraded to 'junk'.

Meanwhile, Pronab Sen, principal advisor, Planning Commission, explained that there is a difference between rise in prices and inflation. He added that the diesel price hike will impact inflation only by around 12%.

However, both experts concurred that the government’s decision has allowed the RBI adequate headroom to act on monetary policy.

Diesel Price Hike in India Today

Below is an edited transcript of their reactions on CNBC-TV18.

Q: This what the PMEAC had been recommending and a decision has been finally taken atleast as far as diesel is concerned. What does this mean in terms of fiscal consolidation?

Rangarajan: I think it will significantly contribute to containing the fiscal deficit. Though the loss in revenue due to the reduction in excise duty needs to be estimated, on the whole, this as a bold step taken by the government towards achieving a balance in the fiscal situation.

Q: But though the government has finally moved on diesel, it has left petrol untouched. Though the government is suffering an under-recovery of about Rs 6 a litre on petrol, the most that has been done is a bit of tinkering with the excise duty on the petrol?

Rangarajan: I think the oil marketing companies will not lose much on petrol because some adjustment has been made to allow them the benefits of a reduction in excise duty. It is important that a balance is maintained between the price of petrol and diesel.

Q: What will this mean in terms of possible RBI response? Is this enough in terms of providing the central bank adequate fiscal room that it looked forward to from New Delhi?

Rangarajan: I think the opportunity for action by the Reserve Bank has been provided by this decision of the government. The RBI will take another look at the inflation data that maybe released in a day or two and then make its move. But the government has boldly shown that it can take very hard and difficult decisions and the RBI should welcome that.

Diesel Price Hike in India List of Prices

Q: Finally the government is biting the bullet by hiking diesel prices by Rs 5 a litre, However the opinion of the RBI and the finance ministry differ regarding the probable impact on inflation. What is your view?

Pronab Sen: We really need to distinguish between rise in prices and inflation. Inflation is a process and something like a diesel price hike will impact inflation only by around 12%.

Q: Do you think there is enough fiscal space already for the Reserve Bank to move on September 17 or will the central bank be well advised to wait for further rollbacks?

Pronab Sen: I have a feeling the RBI  will wait to see if there is a rollback. But even if there isn't a rollback, it would be prudent for the RBI to wait and gauge the level of expectations. So, it does give the RBI a lot more space to relax on monetary policy, but I am not sure if it would reduce policy rates. The RBI may actually just ease up on the liquidity side.

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Diesel price hike: Govt under fire from allies, Opposition, aam aadmi:

New Delhi: The government has finally bitten the bullet on fuel price hike raising the price of diesel by Rs 5 per litre and limiting the usage of LPG to six cylinders per household. Sources say the Sonia Gandhi-led Cabinet Committee on Political Affairs was against it, but were finally convinced by Prime Minister Manmohan Singh to end policy paralysis and bring in big ticket reforms.

But the the government now finds itself under fire from not just the Opposition, but its own allies as well as the 'aam aadmi'. Trinamool Congress chief and West Bengal Chief Minister Mamata Banerjee was the first to react. She will take out a rally on Saturday in Kolkata, demanding a rollback.

Speaking to IBN18 Editor-in-Chief Rajdeep Sardesai, Mamata said, "It wasn't discussed with the UPA allies. I have a great respect for UPA because we know that the government must continue, there should be stability. But at the same time if the deisel price is increased, it will affect the farmers, it will effect the common people and it is very difficult as people cannot survive with this."

She said that the matter was quite serious and her party would not tolerate things that affect people, adding that the government must withdraw the hike.

Key UPA ally DMK, too, has condemned the hike. Party supremo Karunanidhi said, "Already the prices of essential commodities are so high. This hike would further affect the poor and the middle class and increase inflation."

Opposing the diesel price hike, UPA's close ally NCP also demanded a rollback saying the decision will further burden the common man.

"The Centre should consider rollback in diesel price and should not put a cap on subsidised LPG especially given the high price of essential goods thereby affecting the common man," NCP spokesperson Nawab Malik said.

Terming the hike in diesel price as an anti-people step by Congress-led UPA government, the Samajwadi Party announced that it would hold a sit-in against the move across the state.

"The move to hike diesel price is anti-people and will increase prices. Samajwadi Party opposes the move and will hold sit-in across the state to protest the hike," SP spokesman Rajendra Chaudhary told PTI.

BJP leader Yashwant Sinha said, "Diesel increase will have a cascading effect on the economy as a whole. Prices are already not under control, so this is going to contribute to overall inflation and create mayhem in the economy."

Diesel Price Hike in India - Common man Position

CPI National Secretary D Raja termed the decisions as "retrogade and anti-people". "It will have an adverse effect on the prices of essential commodities which are already high. It will further increase hardship of common people. Government should not go ahead," he said.

The 'aam aadmi' was the worst affected. "This decision is going to adversly affect a hard working common man like me. It's getting difficult to drive a car these days," said a consumer in Delhi.

Another consumer in Mumbai said, "The increase in the price of diesel will affect the poor like us the most. As a result of this inflation will increase."

INTEREST RATE MOVE?

The diesel decision was welcomed by investors.

"This is a positive signal because it shows the government is ready to move. But this is only the first step, and lot more needs to be done to bridge the fiscal gap," said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.

On Monday, the RBI is expected to leave interest rates on hold, although several market players said the diesel move adds to the possibility of the first rate cut since April.

"All these days RBI was insisting the government should take steps to control the fiscal deficit. After this move there are all possibilities that the central bank may consider to reduce interest rates on Monday," said R.K. Gupta, managing director of Taurus Mutual Fund in New Delhi.

India has set a target to cut its fiscal deficit to 5.1 percent of GDP in the financial year that ends in March, a goal many economists say it is unlikely to meet.

India's inability to push through major reforms and ease its subsidy burden puts it in danger of becoming the first of the big "BRICS" emerging economies to see its credit rating downgraded to junk.

Later on Friday, the cabinet is expected to consider a proposal to allow foreign airlines to buy stakes in local carriers, a long-stalled move aimed at revitalising the country's debt-ridden domestic carriers, although overseas airlines have shown little interest in investing.

Under current rules, foreign airlines are barred from buying stakes in domestic carriers, although foreign investors are allowed to hold a cumulative 49 percent. If the proposal is approved, foreign airlines would be allowed to buy similar-sized shareholdings.

Whether the diesel price hike sticks remains to be seen.

A leading partner in the ruling coalition announced a protest march at the weekend and the main opposition party called the move "financial terror". Protests earlier this year over petrol price and railway fare hikes prompted Singh to partially roll them back. (Reporting by Rajesh Kumar Singh, Nidhi Verma and Manoj Kumar; Writing by Tony Munroe; Editing by Alex Richardson)

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