If it's June, it's time for a diesel and gas price hike

By R Jagannathan

Dear India, brace yourself for a hike in diesel prices this week. Also LPG. And, maybe, even kerosene. Do we have any inside dope on this? A special line to the PM, maybe?

Nah! But last year the government raised diesel, cooking gas and kerosene prices by 9-20 percent on 24 June and today it is 26 June. The reason why we think June is the month to do the dirty on fuel-pricing comes from recent history. Prices were raised in June 2010, and again in June 2011.

What is so special about June that the government chooses this month to hit us on the head with fuel price hikes? Well, it’s not about June per se. But once you do it in June, it makes sense to keep doing it in June.

Here’s why. Whenever prices of oil are raised, it impacts the wholesale price index during that month; so when you raise prices in the same month next year, the rise is calculated on the higher base - and thus the index impact is less. An increase on an increase always looks less than it is.

It’s all done with mirrors, but for a UPA reeling under charges of economic mismanagement, any bit of successful index management comes as a bonus.

Moreover, this time the political time is propitious. Pranab-da is packing his bags, Mamata-di is in limbo, Mulayam-kaka is in a benign mood, and Manmohan-ji is raring to go to show he is the same man who rescued the economy in 1991. Even Sonia-ji may give a quiet nod.

The paradox is that the hike will come at a time when the oil marketing companies (OMCs) are reporting lower losses on subsidised diesel, cooking gas and kerosene. But you should not be expecting any kind of relief.

True, losses have come down from Rs 563 crore a day in April to Rs 446 crore a day in the first half of June. That still means a potential annual loss of over Rs 1,60,000 crore when Pranab-da has pencilled in only Rs 43,580 crore for subsidies in 2012-13 - and he has already used up a part of it to pay last year’s subsidies. Maybe he knew he wouldn’t have to pay the final bills.

But the crude oil price fall has been partly neutralised by the rupee’s antics - which has declined from 55 to 57 to the dollar over the last few weeks. Again, this means the government will have to increase oil prices if it is to send the right signals on fiscal prudence.

According to the Petroleum Planning and Analysis Cell, losses on diesel currently are at Rs 10.20 a litre, on cooking gas Rs 396 a cylinder, and kerosene Rs 30.53 a litre. These subsidies have to be cut when the going is good on international prices.

However, more than the subsidy argument, the most important reason to raise prices is that politically it is now or never. Psychologically, the public is expecting some hard measures now, especially after the PM promised decisive action with Pranab Mukherjee safely packed off to Rashtrapati Bhawan.

Wait some more, and if oil prices drop further, politically the UPA’s allies and even Sonia Gandhi will say why not wait to see if global prices fall further.

Dr Manmohan Singh, you know why you have to act now. And it’s June-end. You just have days to do your job.