On 23rd May, the government-owned Indian Oil Corporation released a statement declaring a record breaking hike of Rs. 6.28 per litre on petrol, excluding all taxes. Ranging between Rs. 0.94 to 2.07 per litre, the sales and Value Added Tax (VAT) differ from state to state. The national capital, New Delhi, will witness a hike of Rs. 7.50 in the price.
This hike in the price of petrol was expected after the fuel was deregulated by the government in June 2011, which put the price out of its control. However, oil companies like BPCL, HPCL and IOL were asked not to raise the price immediately until after the elections last year and prices were last revised on 4th November 2011. This delay was accepted by oil companies despite the fact that oil price had been rising at 14 per cent and the Rupee lost its value against USD at the rate of 7 per cent. Notably, oil companies would have accrued a loss of Rs. 8000 crores annually without this hike if the Indian currency fell by even a single rupee against the US dollar.
The increase in prices of petrol translates into lessen the burden of finance on the government. Thus, it may also consider hiking the price of diesel by Rs. 5 per litre and that of LPG cylinder by Rs. 50 on every cylinder. The government borrows from the Reserve Bank of India to compensate for the reduced price of diesel and LPG. Now, it feels the need to reduce the borrowings immediately keeping the sharp decline of the Rupee in mind. However, the recent price hike will possibly lead to inflation and infuriate the citizens further. In its defence, the government was compelled to bring this into effect in a bid to strengthen its finances.
In Union Budget 2012-13, the oil subsidies provided by the government amounts to Rs. 43,600 crores, which is expected to grow to Rs. 75,000 crores. The only measure for it to prevent this is by hiking the fuel price and a significant impact will be delivered if the price of diesel and LPG too are hiked.
Since the last time when the prices were revised, the entire industry accumulated losses worth Rs. 4,651 crores, while Indian Oil Company lost Rs. 2108 crores. The company accrued the losses at Rs. 13.64 on each litre of diesel, Rs. 31.41 per litre of kerosene and Rs. 479 on every cylinder of LPG.
A big casualty will be the domestic automotive industry, where most of the companies manufacture petrol cars. These companies have already initiated the process to increase the capacity of diesel production and build new line-up of diesel variants. Chairman, Maruti Suzuki India, R.C. Bhargava, summed up the situation by saying, "Demand for diesel vehicles will go up, sales of petrol cars will go down."
Political allies to the government like DMK and Trinamool Congress have already expressed their disappointment and concerns to the Centre after the hike. The real turbulence will come when the government will hike the prices of the diesel and LPG. The opposition party, BJP, has already asked the Centre for a rollback in prices.
With annual domestic production volume of 37-38 million tonnes of oil and byproducts, the country also imports 170 million tonnes from overseas. According to analysts, the natural gas production will not meet the requirements leading to even more import by India in 2012. This underscores the need to raise prices of petroleum products, which will inadvertently put the citizens in a worse spot.
