Like rail freight, oil price hike may also precede budget

New Delhi: The sharp, almost 20 percent increase in rail freight rates announced on Tuesday evening - just a week before the railway budget is due to be presented in Parliament - suggests that the Manmohan Singh government may be planning to push through some unpalatable steps quickly before Parliament convenes.

This could mean action on petrol and diesel price increases, among other things. The government may not wait for the regular Union Budget - to be presented on 16 March - in order to take advantage of the small window available when Parliament is not in session and the dust from the recent election excitement is yet to settle.

The 20 percent rail freight hike - which varies across commodities and carrying distances - is expected to raise around Rs 10,000 crore for a cash-starved Indian Railways. Some estimates put the revenue impact at Rs 18,000 crore, but no one is sure since the actual revenues will depend on whether traffic increases or decreases after this move.

In fact, Tuesday’s sudden hike is the second time the railway ministry under Dinesh Trivedi is resorting to raising rates outside the rail budget. In mid-October 2011, he had raised freight by around 6 percent to prevent the railways from sinking into losses.

The political reason for announcing freight increases outside the budget is clear: the hard decisions get implemented by administrative action, while the actual budget can then be presented as an easy and populist one which raises few political hackles.

The decision on raising railway freight in fact makes it easier for the government to take decision on raising petrol and diesel price hikes, since the main impact of these decisions will be on the trucking and cargo movement industry. A diesel price hike means truck costs for moving cargo will rise, but if rail freight is also up, the relative competitive position of cargo moved by road does not change.

So, is the freight hike move a precursor to hikes in petrol and diesel prices?

Oil marketing companies are already pushing for a Rs 5 per litre increase in petrol and a moderate increase in diesel prices may not be too far away. With the assembly polls out of the way, tough decisions may be just round the corner.

Already, power tariffs are set to move up by approximately 10 paise a unit on an average due to the railway freight hike, says Wednesday’s Business Line. The announcement will lead to an approximately 20 percent hike in coal freight rates - or Rs 120 a tonne on an average. For a benchmark travel of 700 km of Indian coal, the tariff has moved up by Rs 132 a tonne to Rs 792.

As for items like foodgrain and fertilisers, the railways claim the freight rate increase will not impact the common man as the burden will be absorbed by government agencies like Food Corporation. The government subsidises food and fertiliser - and the freight hike will go back to bloat the subsidy bills under these heads.

So while freight rates could push up power tariffs, a petrol and/or diesel price increase will directly add to overall inflation in the near future. Shubhada Rao, economist with Yes Bank, says an increase of Rs 2 in diesel prices coupled with Rs 4 in petrol would push up the Wholesale Price Index (WPI) by 30-40 basis points (by 0.3-0.4 percent).

Soumya Kanti Ghosh, Director (Economics and Research) at industry chamber Ficci, does not believe the government will tamper with diesel prices in a hurry though it may be unavoidable. Any increase in petrol prices would be a delayed move, coming at a time when international crude prices may have already begun to taper off from their highs. He agreed that inflation would be stoked by these measures but said this would only be for the short term.

“I am not sure how much the government will go along with oil companies and bite the bullet on petrol and diesel price increase. A petrol price increase in overdue and so is a decision on bridging the gap between petrol and diesel pricing,” Ghosh said.

The railways are expected to garner about Rs 70,000 crore from freight earnings in the current fiscal and the freight increase would mean a potential to increase annual earnings by Rs 10,000-18,000 crore.The hike comes at a time when Rail Minister Trivedi is under pressure to raise resources to drive the state-run transporter out of a financial mess.

And as far as petrol prices are concerned, they were last revised on 1 December when crude was priced at $109 to a barrel in regional bulk markets. At current prices, oil marketing companies are losing more than Rs 5 a litre.

Raising diesel prices will, however, have political impact - since it will not only raise transport costs and inflation, but also upset the farm lobby, which uses diesel pumpsets. This is why government has talked of taking the easier option of taxing diesel vehicles - the so-called taxing the rich option.

The Times of India said on Wednesday that the government may give the go-ahead to oil firms to raise petrol prices, taking the stand that it has no say on this matter. But it may find revising prices of diesel and kitchen fuels (kerosene and LPG) much more difficult.

But it is anybody’s guess whether a politically-frightened government will want to wait for a parliamentary confrontation over fuel prices to tie its hands further on the subsidy front.