'Kerosene price hike a positive signal on reforms'

The government decision to hike kerosene prices, although staggered over 10 months, sends a positive signal on reforms and will ease the fiscal subsidy burden by Rs 11.9 billion (Rs 1,190 crore), says a report.

According to Japanese financial services major Nomura, every Rs 1/litre rise in kerosene price lowers the under recovery by Rs 8-9 billion.

"Hence, from a financial perspective, a Rs 2.5 per litre rise in kerosene prices over the next 10 months will lower kerosene's under-recovery by around Rs 21 billion and ease the government's fiscal subsidy burden by Rs 11.9 billion (0.01 per cent of GDP)," it said in a research note.

The current under-recovery in kerosene is Rs 13.1 per litre, of which the government subsidises Rs 12 per litre with the rest (Rs 1.1 per litre, as of now) borne by upstream oil companies.

The government has given a directive to oil companies to increase kerosene prices in a staggered manner, by Rs 0.25 per litre every month until April 2017 (a cumulative increase of Rs 2.5 per litre in 10 months).

"The macroeconomic implications of this move are minimal, but it has an important signalling impact," Nomura said in a research note.

The report further noted that the inflationary impact of the move should also be minimal, because of the low weighting of kerosene in the CPI basket.

"Both the fiscal and inflationary impact of the staggered kerosene price hike is insignificant. However, the signalling impact is important," it said.

Kerosene is predominantly used by rural poor households and hence any change in price is a politically sensitive decision.

In rural India, 26.5 per cent of all households use kerosene as the primary source of lighting with the percentage as high as 73.5 per cent in certain rural states such as Bihar and 58.5 per cent in Uttar Pradesh, which is due to hold elections in early 2017.

"As such, the staggered rise is a signal of the government's commitment to good economics rather than populist policies," Nomura said.