India Raises Diesel Prices First Time in a Year to Cut Subsidies, Deficit

By Rakteem Katakey and Anto Antony - Jun 24, 2011

India raised diesel and cooking gas prices for the first time in a year to reduce losses at state- owned refiners and narrow its budget deficit to a four-year low.

A panel of Indian ministers, led by Finance Minister Pranab Mukherjee, allowed refiners including Indian Oil Corp., the nation’s biggest, to increase diesel prices by 3 rupees (7 cents) a liter, kerosene by 2 rupees a liter and cooking gas by 50 rupees for every 14.2 kilogram bottle, Oil Minister S. Jaipal Reddy said in New Delhi yesterday. The tariffs don’t take into account the taxes imposed by state governments, he said.

Higher fuel costs will accelerate inflation in Asia’s second-largest energy consumer, where diesel and cooking-fuel prices are capped to protect the livelihoods of 75 percent of the population the World Bank says survives on less than $2 a day. Inflation in India is already more than twice the rate in the U.S. and almost four times Germany’s.

“I am sandwiched between economists on one side and populists on the other,” Reddy said. “We have to watch crude prices, we have to look at other devices” to compensate the refiners for the remaining revenue loss, estimated to reach 1.2 trillion rupees in the current year ending March 31.

Reddy said the government also removed the 5 percent customs duty on crude oil, cut the levy on diesel and gasoline by 5 percentage points, and lowered the excise duty on diesel to 2 rupees a liter from 4.6 rupees a liter. The tax cuts will cost the government 490 billion rupees, he estimated.
Duty Cuts

“I have taken the risk of reducing the duties so that relief can be given to consumers,” Mukherjee told reporters in New Delhi yesterday.

Shares of state refiners rose in Mumbai trading yesterday. Indian Oil gained 2.5 percent to 336.90 rupees, compared with a 2.9 percent gain in the benchmark Sensitive Index. Bharat Petroleum Corp. increased 2.8 percent to 634.70 rupees, while Hindustan Petroleum Corp. advanced 6.1 percent to 392.60 rupees. State-run Oil & Natural Gas Corp., which bears part of the refiners’ subsidy burden, rose 3.1 percent to 272.80 rupees.

India last raised prices of diesel, kerosene and cooking gas on June 26 last year. High food prices and provincial elections prevented Prime Minister Manmohan Singh’s government from boosting prices of the fuel that is used to run everything from trucks and water pumps to electricity-generator sets.
Rising Prices

India’s inflation accelerated to 9.06 percent in May. An index measuring wholesale prices of agricultural products rose to a two-month high of 9.13 percent in the week ended June 11 from a year earlier, the commerce ministry said June 23.

Diesel has a 4.7 percent weighting in India’s benchmark wholesale-price index and gasoline 1.1 percent.

Oil for August delivery rose 14 cents to $91.16 a barrel on the New York Mercantile Exchange yesterday. The August contract is down 2.4 percent this week. Crude oil in New York trading increased 17 percent since June 28, 2010.

China, the world’s fastest-growing major economy, raised diesel prices by 400 yuan ($62) a metric ton, or 0.34 yuan a liter, on April 7, the fourth increase since Oct. 26 last year, according to data on the National Development and Reform Commission website.

On May 15, Indian Oil boosted the price of gasoline by 5 rupees a liter to 63.37 rupees, the biggest increase since June 2008.

State refiners were losing 4.6 billion rupees a day by selling diesel, kerosene and liquefied petroleum gas below cost, the petroleum ministry said before yesterday’s announcement. The government gives the refiners cash to compensate part of the losses.

Mukherjee, in his Feb. 28 budget, estimated a spending of 236.4 billion rupees on fuel subsidies in the year to March 31, less than the 383.8 billion rupees spent in the previous 12 months.

India aims to narrow the budget deficit to 4.6 percent of gross domestic product in the current fiscal year through March, from 4.7 percent of gross domestic product in the previous 12 months.

To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net; Anto Antony in New Delhi at aantony1@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net
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