Wed, 01 Jun 2011 09:43:08 GMT

FinMin develops cold feet on diesel price rise

High wholesale price index (WPI) inflation is forcing the finance ministry to re-visit plan to increase diesel prices.


A senior finance ministry official told Business Standard an increase in diesel prices at this stage would impact prices at a time inflation management was the government's top priority. An empowered group of ministers (EGoM), headed by Finance Minister Pranab Mukherjee, is meeting on June 9 to take a decision on increasing diesel, kerosene and liquefied petroleum gas (LPG) prices.

High crude oil prices are putting pressure on oil marketing companies, which sell these three fuels at prices set by the government. This is threatening to increase the government's oil subsidy bill as well.

However, the official indicated the finance ministry was against a steep increase immediately, especially in diesel. He hinted at the possibility of the EGoM delaying the decision till there was consensus among the allies of the government.

The government recently allowed oil companies to raise petrol prices by Rs 5 a litre. Petrol accounts for just 12 per cent of the country's fuel consumption. Diesel, with 40 per cent share, has a much bigger impact on prices of other commodities and services.

Diesel, kerosene and LPG have a combined weight of 6.32 per cent in WPI, which rose 8.66 per cent in April. The weight of diesel alone is 4.67 per cent. The recent increase in petrol prices is yet to reflect in WPI. A YES Bank research shows the increase will add 14 basis points (bps) to the May WPI number. The weight of petrol in WPI is 1.09 per cent.

The research hints at more acute pressure if LPG and diesel prices are increased. A Rs 3 per litre increase in diesel prices will add 40-45 bps to the WPI number. A Rs 30 increase in the price of an LPG cylinder is expected to add 10 bps to the WPI number. The weight of LPG in WPI is 0.91 per cent.

The Reserve Bank of India said in annual monetary policy that inflation control needed to be given priority over growth in the short and medium term.

The last increase in diesel, kerosene and LPG prices was in June last year, when crude oil price was $72 per barrel. The average crude oil price has been $110.55 a barrel this month. The price, though, has been declining for a few weeks.

Government oil marketing companies are losing Rs 16.49 on every litre of diesel, Rs 29.69 on every litre of kerosene and Rs 330 on every LPG cylinder.

A higher subsidy burden is likely to impact the government's ability to meet its fiscal deficit target of 4.6 per cent of gross domestic product. The finance ministry is, however, confident of meeting the target.

Source: Business Standard

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