The markets have cheered the government's decision, with the Sensex scaling the 20,000-mark in morning trade. But allies like the DMK, which is part of the UPA government and Mayawati's Bahujan Samaj Party, which provides crucial external support, have strongly criticised it. The ruling Congress says the government is doing a fine balancing act.
The first cautious step towards deregulation of diesel came in a mixed bag of announcements yesterday as the government attempted to balance populism and reform. While allowing oil companies to make small hikes in diesel prices, the cabinet committee on political affairs also announced a raise in the cap on use of subsidised cooking gas cylinders or LPG from six to nine. There is, however, a steep Rs 46.50 hike in the price of non-subsidised cooking gas. A non-subsidised cylinder will now cost Rs 942 in New Delhi.
Finance Minister P Chidambaram stressed that the "freedom" extended to the oil companies was restricted. "I emphasize on the word small corrections from time to time," he said. And Oil Minister M Veerappa Moily explained, "Oil firms lose close to ten rupees on each litre of diesel." Sources say small hikes by oil firms will be spread over the next few months to make up for these losses.
The government's partners are unimpressed. "Poor and middle classes can't bear the monthly diesel price hike by 50 paise," DMK chief M. Karunanidhi said, warning that this could lead to a rise in the prices of other commodities. He also said the number of subsidised cylinders for each household should be raised to 12 per year.
Mayawati was scathing in her attack on the Congress today, saying, "They have also increased diesel prices and rail fares; it is amply clear that Congress is not with the aam admi. They are in favour of industrialists and the rich. My advice to the Congress party is that they should take up these matters at the Chintan Shivir in Rajasthan, otherwise the people will give them a reply in the general elections."
Kamal Farooqi of the Samajwadi Party, which too provides external support to the Manmohan Singh government, said, "I don't know why the government is playing such games. The oil companies which are already having fun of it will earn profit at the cost of the poor."
Opposition parties too have expectedly criticized the move, saying it will only add to the burden of the aam aadmi, struggling as he is with inflation. The BJP's Prakash Javadekar said, "First rail fares and now oil. This is a Congress game." He also dismissed the hike in the LPG cap saying, "Six to nine, this is nautanki (drama)." And Left leader Prakash Karat described the move on diesel as an attack on the people."
Congress leader Digvijaya Singh was thus a minority voice today as he pointed out that raising the cap on the number of subsidised LPG cylinders was a positive step. He added that once diesel prices are deregulated, the government should look at subsidizing farmers through dual pricing or by cash subsidies.
The government has got a big thumbs up from the markets. This morning the BSE Sensex scaled the 20,000 mark in early trade on the back of a strong rally in oil and gas stocks. It traded 122 points or 0.6 per cent higher at 20,086 while the broader Nifty jumped 31 points to 6,070 at 9.21 a.m.
State-owned oil marketing firms and upstream firms, which contribute to the fuel subsidy bill, saw strong buying interest. The BSE Oil and Gas index traded with over 4 per cent gains, extending yesterday's rally.
According to Indian Oil, the hike in diesel price will lead to a cut in under-recoveries by Rs 3,400 crore till March 2013 or almost Rs.15000 crore for a year. An order issued by the Oil Ministry after the Cabinet decision stated that bulk users of diesel be charged market price for LPG and Indian Oil has announced that the price for bulk users will be hiked Rs 9.25 (excluding VAT) over and above the current rate of Rs 47.15 in Delhi. The government is expected to save about Rs 9,000 crore from this.
Indian Oil also said it expected little benefit from the Rs 46.50 hike in the price of a non-subsidised LPG cylinder as that would be offset by the increase in the number of subsided cylinders from six to nine. That hike, in fact, it said, will increase under-recoveries for all oil marketing companies to Rs.10,000 crore.
The decision to increase the number of subsidised cylinders allowed per household from six to nine comes after much political pressure from not just other parties, but also the Congress, that leads the UPA government at the Centre. The increase will be effective from April 2013; for the remaining part of this fiscal year, ending March 31, 2013, the cap has been hiked to five from three.
The decision to limit the use of subsidised LPG cylinders to six per household was taken by the Manmohan Singh government in September last year as part of a bucket of reforms that saw the Trinamool Congress quit the coalition government in a huff, reducing it to a minority in the Lok Sabha.
India's policy to subsidise retail prices of fuels such as diesel, which accounts for about 40 per cent of refined fuel consumption, is a major drain on the budget. Ratings agencies threatened last year to strip India of its investment-grade credit rating if the government did not take steps to rein in a widening fiscal deficit. Mr Chidambaram has repeatedly vowed that the deficit will not exceed 5.3 per cent of gross domestic product this financial year.