FUEL PRICE HIKE WILL STOKE INFLATION TO DOUBLE DIGIT

By Ruma Dubey

Finally the Govt had to bite the dust! Economical sense, albeit very late, managed to push out political compromises. Last time the oil price was hiked, it was in February 2008, when oil price had touched $67 per barrel. Today oil is at $127 per barrel and yet, the Govt took its own time, contemplating whether to hike or not! And when it did hike the prices, it has been too steep and this is sure to have a cascading effect all over.

Today, pushed to the corner, the Govt hiked the price of petrol by Rs.5 per litre and diesel by Re.3 per litre to put a lid on the losses of public sector oil companies. Kerosene prices remain unchanged. The cost of LPG has been hiked by Rs.50 per cylinder. The customs duty on crude oil has been reduced to nil from the existing 5%. Excise duty on petrol and diesel reduced by Re.1 per litre.

Along with the price hike, the Govt has also decided to increase oil bonds, issued to offset losses due to fuel sales below cost price. It will now issue additional oil bonds worth Rs.94,601 crore to the oil marketing companies. The Govt has stated that duty changes on petroleum products would result in revenue loss of Rs.22,660 crore in the remainder of the current fiscal.

There has been immense pressure on the Govt to hike the prices of fuel but it managed to hold its steed and circumvented the thorny issue through its oil bonds. That helped it hold ground for some time but soon even that was bleeding the oil companies dry.

Economically, this was a much needed hike but for the common man, this is going to hurt the pockets real bad. When the global crude oil price touched $135 on 23^rd May, there was a sense of helplessness. The Govt, since then has been caught in a bind – should it hike the fuel prices and invite the wrath of the people or should it continue to push things under the carpet, making a sacrificial lamb of India’s great growth story? Actually there was no need to make a choice, the need of the hour was the fuel price hike and it is good that the Govt finally showed courage and raised the prices.

Oil marketing firms finally had something to cheer about. The three PSUs - Indian Oil, Bharat Petroleum and Hindustan Petroleum were losing Rs.725 crore per day on fuel sales. They have already borrowed up to Rs.70,000 crore worth of crude as against their limit of Rs.90,000 crore. This highlights the plight further, meaning, apart from cash crunch, they would soon be looking at a scene of oil shortage too. BPCL and HPCL had issued warnings that it may have to shut down soon as they were on the brink of running out of cash to import crude. IOC has already sought approval from its shareholders and Board to sell assets to tide over the difficult situation. Price hike, duty cuts and more oil bonds, the basket of goodies for the oil marketing companies is now full to the brim!

There is no doubt that this fuel price hike would further stoke the already soaring inflation. Commodity prices are expected to go up further. Inflation for the week ended 17^th May 2008, had already touched a 3-½ year high at 8.1%. There is just no way around controlling rising prices any more. Analysts say that inflation in the coming months would now be around 10%, on the back of the hiked fuel prices. This has been justified by looking at the historical data which reveals that when the fuel prices were hiked by Rs.2 per litre for petrol and Re.1 for diesel, in February 08’, Wholesale Price Index (WPI) was up more than a point in the subsequent two weeks. So now that the hike is to the extent of Rs.5 in petrol and Rs.3 in diesel, then inflation might even cross 10% by June last week.

The coming days will be tough for the entire country, infact globally; things are expected to be quite somber right now. The immediate reaction of the fuel price hike would be morchas and protests. The auto and taxiwallahs would now demand a price hike. Air fares would go up. Cost of transporting goods from one place to the other would be up and this would in turn, fuel all round price rise. Freight rates would be up and this is sure to push up costs of commodities further. Naturally, consumption would go down. The immediate victim would be the automobile companies, which would see a major slump in buying in the current quarter. But as time goes by, people get used to the new prices and then they once again reconcile themselves to the hiked prices.

For now, get set to wait in serpentine queues to fill up your car fuel tank to take advantage of the “old price” before the stroke of midnight tonight. And all those who booked their LPG cylinders and get it delivered today, can surely count themselves amongst the lucky few!