The Indian government has decided to hike prices of petrol by Rs 7.50 per litre on Wednesday evening. A ministerial committee is likely to meet on Friday to decide on a possible Rs 5 per litre hike in diesel and Rs 50 per cylinder hike in liquefied petroleum gas or LPG.
Here are ten latest facts:
1. Petrol prices hiked: The government on Wednesday hiked the price of petrol by Rs 7.50 per litre. In a statement released on Wednesday evening, the state-run Indian Oil Corporation said it was hiking petrol prices by Rs6.28 a litre, exclusive of sales/value-added taxes. Sales and VAT taxes differ from state to state, and range between 94 paise and Rs 2.07 a litre. Petrol prices will go up by Rs7.50 in New Delhi.
2. Relief for oil companies: Every one rupee rise in US dollar wipes out Rs 8,000 crore annually from revenue of oil marketing companies. The hike in petrol prices was largely expected as petrol prices have been decontrolled. This means the government does not fix them. However, state-owned oil marketing companies like BPCL, HPCL and IOC were not allowed to pass on rising oil prices to consumers due to elections last year. The government had decontrolled petrol price in June 2010 but rates were last increased on November 4 last year. This despite oil price rising by 14 per cent and 7 per cent fall in value of rupee against the US dollar.
3. More fuel price hike: The government is also likely to consider raising diesel prices by Rs 5 per litre and LPG cylinder prices by Rs 50 per cylinder. The hike in fuel prices means lesser burden on government finances. The government compensates oil marketing companies for discounted prices of diesel and LPG. It borrows from RBI to pay for the subsidies. With the rupee falling sharply to touch record lows, the government has to cut the borrowing.
4. Government finances called for action: The government action may be negative for consumers and add to inflation. However, the move was necessary to shore up government finances. The rupee slump could continue if the government does not cut borrowing and reduce expenditure.
5. The government oil subsidy is estimated to the tune of Rs 43,600 crore in the budget for 2012-13. Analysts expect this to surge to over Rs 75,000 crore. The only way the government can cut fuel subsidies is by passing on hike oil prices to consumers. A material impact is possible only if the government hikes diesel and LPG prices.
6. Revenue loss: In its statement, IOC said it has lost Rs 2108 crore, while the industry has lost Rs 4651 crore since the last change in prices. It added that it was suffering revenue losses of Rs13.64 on each litre of diesel, Rs31.41 a litre on kerosene and Rs479 on each cylinder of LPG.
7. Auto sales may drop: Besides the obvious dent it will make in consumers' budgets, the price hike is also likely to impact auto companies, particularly two-wheeler makers, that largely make petrol-driven vehicles. Already, most carmakers are launching diesel versions as well as ramping up capacity for diesel vehicles. "Demand for diesel vehicles will go up, sales of petrol cars will go down," said R.C. Bhargava, chairman of Maruti Suzuki India, the country's largest carmaker.
8. Political parties could protest the hike: The government has to pass on this fuel price hike to consumers. Allies like DMK and Trinamool Congress have already expressed concern and unhappiness. The real test of this government would be when it decides to hike prices of diesel and LPG. It may have to face some stiff resistance from within. The opposition BJP has already called for a rollback.
9. Oil imports could rise: India imports about 170 million tonnes of oil or equivalent products each year while domestic production is about 37-38 million tonnes. Analysts say that the natural gas production is likely to fall short of expectation. This could mean India may have to import more oil this year.
10. There is hope in falling international oil prices: Oil fell on Wednesday on growing hopes of a deal between Iran and the U.N. nuclear watchdog, which eased fears of oil supply disruption, while concerns over the debt crisis in the euro zone and a slowing Chinese economy weighed on demand. Brent crude fell $1.39 to $107.02 per barrel. U.S. July crude fell $1.08 to $90.77. Brent crude oil has fallen from a peak of $128.40 at the start of May and is down 12.9 percent this quarter, its biggest such drop since the fourth quarter of 2008.