Oil slick? Fuel prices will test govt's nerves, resolve

The unfolding drama over fuel prices will test the United Progressive Alliance (UPA) government’s resolve and its ability to manouvre what is easily one of the trickiest patches in its path to better economic management. While several quarters have lauded the government’s move to stand firm on the steep petrol price hike of 11 percent, how the government is able to play out the pricing of the remaining fuels will demonstrate its political resolve.

Already, the middle class is up in arms against this steep hike, questions have been raised about the timing of the move and political parties across the board have protested against it.

More from Politics

Is Shashi Tharoor’s breakup with Congress inevitable? ‘Naxalism will end in India by March 2026’: Amit Shah at CRPF Raising Day parade

Business Standard er reports that two states - Kerala and Uttarakhand - have decided to cut state taxes to ease the burden after the Congress party, sensing stiff opposition to the government’s move, asked states ruled by it to examine possibilities of cutting taxes.

[caption id=“attachment_321366” align=“alignleft” width=“380” caption=“AFP”]  [/caption]

Analysts, however, are calling the petrol price hike ‘sentiment positive’ given the fact that there was little else the government could do to address the problems of the oil companies.

The price hike in petrol, despite its obvious burden, would have limited impact on inflation, since petrol has a small weight in the wholesale price index (WPI) - of 1.1 percent. Citi’s Rohini Malkani argues that the direct impact would be about 12 basis points on headline WPI. “Assuming a partial adjustment in the other fuels (diesel - Rs 5/litre, LPG - Rs70/cylinder and Kerosene - Rs2/litre), the impact on inflation would be about 80 basis points.” (100 basis points = 1 percentage point.)

But despite the hike in petrol prices, the subsidy bill remains unchanged since losses on petrol are not included in oil under-recoveries. However, it could bring down full-year losses incurred by oil companies on petrol by about Rs 11,000 crore, Malkani reckons. Citi estimates a total of Rs 1.6 lakh crore of losses - an all-time high – on account of diesel, LPG and kerosene.

Of this, diesel accounts for Rs 90,900 crore, LPG Rs 35,800 crore, and kerosene Rs 35,700 crore. “Assuming the past subsidy sharing mechanism, the govt’s subsidy bill would be Rs 73,000 crore.” This would be a massive burden on the government. Price hikes in these remaining fuels are, therefore, essential if the subsidy bill has to be brought down. The FY13 (financial year ending March 2013) budget provision on fuel subsidies have been used up for payment of FY12 dues, Malkani points out.

The Wall Street Journal has called the petrol price hike a bold move, and has hoped for more such steps from the government. But the real challenge is whether the government can manage the political fallout of increasing the prices of other politically sensitive fuels. But oil companies have already started talking of a possible price cut in June, if current price trends continue.

The trend in oil prices could actually come as a breather for the government, strapped for cash and straining to keep political allies happy. Estimates reckon that if oil prices sustain at $100 a barrel, total under recoveries would moderate and the government’s share would reduce to around Rs 46,500 crore.

An editorial in Business Standard argues for smaller, more frequent price hikes to ease the burden somewhat while addressing the subsidy imperatives. The newspaper also makes the important point that petrol prices may have been decontrolled on paper, but not de-politicised. That is what was needed. Failure to do that has now meant the government is caught in a cleft-stick. For the remaining fuels, the government is in a bind: damned if it isn’t able to take the bitter decision, and damned if it does.

All eyes will now be on the government to figure out whether its boldness was a one-off affair limited to petrol, or whether it can follow it through and take the tougher call.