The government today cut prices of petrol by 10 per cent and diesel by 6 per cent, effective midnight, a day before the government and the Reserve Bank of India (RBI) are expected to announce a coordinate economic stimulus package combining infrastructure investment, excise breaks and key lending rate cuts.

Prices of cooking gas and kerosene were, however, left untouched. Fuel prices were last cut in February 2007. Prices have since been increased with crude oil prices doubling between July 2007 and July 2008. The government raised petrol prices by Rs 5 per litre, diesel by Rs 3 per litre and cooking gas by Rs 50 per cylinder in June this year. Global crude oil prices have fallen by around 70 per cent from its peak in July to its lowest in three years.

The Election Commission, however, has said that the move to reduce fuel prices is in the national interest and does not violate the election code of conduct.

The fuel price cut is likely to bring down inflation, which has already fallen to 8.4 per cent for the week ended November 22 from a high of nearly 13 per cent in early August.

“Inflation is already sliding faster than expected and a fuel price cut will push it down further. This will give more room to the RBI to reduce interest rates and generally boost the economy,” said Crisil’s Director and Principal Economist DK Joshi.

The Wholesale Price Index (WPI) -based inflation went up 2.34 percentage points immediately after prices of petrol and diesel were raised by Rs 5 and Rs 3 per litre respectively in the first week of June. The inflation rate stood at 11.66 per cent for the week ended June 9, 2008, against 9.31 per cent in the previous week.
 

Although the government scrapped administered pricing in April 2002, it gradually reverted to the system. The three state-owned companies — Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation — dominate this market with over 95 per cent share. Private retailers such as Reliance Industries and Essar Oil exited automobile fuel supply earlier this year since the lower prices offered by the government-owned retailers made their businesses unviable.

The state-owned oil marketing firms will, however, see pressure on their finances, which had improved with oil prices falling around 70 per cent to $45 per barrel from a high of $147 per barrel in July this year.

The companies currently make a profit of around Rs 15 for every litre of petrol they sell and around Rs 3 for every litre of diesel. They still lose money on kerosene and cooking gas sales.

Together, they are expected to lose over Rs 1,00,000 crore in the current financial year as a result of government pricing mandates.

With the price cut the profits on petrol and diesel will come down, thus pushing up the annual losses of these companies.

“The fact is that we were anyway going to make losses this year,” said Sarthak Behuria, chairman of Indian Oil Corporation, which supplies half the fuels the country consumes. “A fuel price cut right now will marginally impact our profits 5 to 10 per cent. The issue is much bigger. We need more oil bonds to make good our losses from the earlier part of the year,” he said.

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