Note to UPA: After petrol, why no diesel hike?

Did the government just shoot itself in the foot?

Having allowed state-run oil marketing companies to raise petrol prices by a steep Rs 7.50 per litre, there seems to be no sign of any hikes in diesel and cooking gas prices, which are bigger fuel price reform measures.

A high-powered ministerial meeting on petroleum scheduled for Friday to discuss a diesel and cooking gas price hike seems very much in doubt as protests gain momentum over the steepest increase in petrol prices ever. It seems to have scared the government off. Who knows, it may be months before we get a diesel price hike.

For now, attention has shifted to a possible partial ‘roll-back’ of the hike in petrol prices (some media reports suggest by up to Rs 2.50 per litre) and whether state governments should cut taxes to reduce the impact of the nearly 12 percent increase in petrol prices.

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[caption id=“attachment_320770” align=“alignleft” width=“380” caption=“While the price hike will provide some relief to state-run oil marketing companies, it does not cut down the subsidy burden 0f the government .Reuters”]  [/caption]

For a government desperate to cut its weighty subsidy bill, allowing petrol prices to be hiked and then backing off on doing the same with diesel is, to put it mildly, going in the wrong direction.

That’s because while the price hike will provide some relief to state-run oil marketing companies, it does not cut down the subsidy burden 0f the government. The government does not subsidise petrol, although these companies sell petrol below required market rates. The losses on selling petrol are borne entirely by companies. Indian Oil Corporation, for instance, said on Thursday that it has lost up to Rs 1,056 crore in the past 50 days because of selling petrol at below-market rates.

For the government, the petrol price hike is likely to worsen the subsidy bill because it increases the gap between petrol and diesel prices even more. Diesel (whose price is controlled and subsidised by the government) is now cheaper than petrol by at least Rs 30 per litre, which will reinforce demand for diesel. Higher demand for diesel will only increase the subsidy burden of the government.

Almost every economic expert has urged the government to de-regulate the price of diesel. However, so far, a politically weak government dependent on fractious allies, has been unable to do so. As a possible intermediate step, at least it could consider fixing a per litre subsidy rather than basing it on the price of diesel, which is what the Economic Survey for 2012-2013 suggested.

The current subsidy per litre of diesel amounts to about Rs 13 per litre. Yet the last time diesel prices were hiked was June 2011.

Petroleum products and fertilisers accounted for a substantial chunk of the government’s Rs 2.1 lakh crore subsidy bill in the financial year ended March 2012. With global crude prices rising in 2011-2012, oil subsidies shot up by nearly 80 percent to Rs 68,481 crore.

The petrol price hike, with no accompanying hike in diesel or LPG prices, threatens to make the situation worse. What exactly was the government thinking?