With food inflation at a five-week high of 12.13 per cent, passing on the diesel loss will be a tricky decision for the empowered group of ministers, which is expected to meet on December 30. Experts say the government may have to defer the rise by a few weeks. A rise in diesel, where the oil companies are losing over Rs 6 per litre, will have an impact on price of foods and vegetables, which are mainly transported through trucks.
The diesel increase will aggravate the situation where the government is firefighting to control onion prices, that had skyrocketed to Rs 70-80 per kg. Milk prices have also shot up, with Mother Dairy raising prices by Rs 1 a litre last week. “Existing pressure from food and vegetable prices may prompt the government to defer a hike in diesel by a few weeks. But a hike is warranted in the last quarter, given the high crude oil prices,” said Shubhada Rao, chief economist, YES Bank.
Of the three petroleum products whose prices are regulated by the government, diesel has the highest weight, of 4.6702 per cent, followed by LPG (0.91468 per cent) and kerosene (0.73619 per cent) in the wholesale price index (WPI). “It will be difficult to hike diesel price, as inflation is already above the comfort zone and is not falling as expected. This is going to be a tough decision. Any hike will add to the existing pressure because diesel is used in a variety of services, ranging from production to transportation. A hike would have an immediate one-time effect, followed by a multiplier effect,” said D K Joshi, chief economist, Crisil.
Petrol, whose price stands decontrolled since June 25, has a weight of 1.09015 per cent. Petrol price was increased by Rs 2.95-2.96 per litre last week and its impact on WPI inflation will be visible when data for December is announced. WPI inflation for November was 7.48 per cent.
Abheek Barua, chief economist of HDFC Bank said the government would try to hold the hike as much as possible. While on one hand consumers are exposed to high commodity prices, loses are piling up with the public sector oil marketing companies (OMCs). The OMCs — Indian Oil, Hindustan Petroleum and Bharat Petroleum — which purchase crude oil at market rates, are required to sell diesel, kerosene and LPG at government-capped prices, resulting in losses. These losses are usually compensated through a mix of cash subsidy from the government and discounts from upstream companies like Oil India and Natural Gas Corporation and Oil India Ltd.
Besides the current loss of Rs 6.08 per litre on diesel, the oil firms currently lose Rs 17.72 a litre on kerosene sales and Rs 272.19 per 14.2-kg LPG cylinder. While a diesel price rise has been kept in abeyance, the OMCs could not even pass on the entire loss of Rs 4.17 per litre on petrol and had to settle for a lower one of Rs 2.95, though petrol is decontrolled. Moreover, these companies had to wait for the end of Parliament’s winter session to announce the petrol hike. At this rate, these companies could end the financial year with a gross under-recovery of Rs 68,000 crore.
The December average price for the Indian basket of crude is swiftly inching towards $90 per barrel. The basket of crude oil has averaged around $89.31 per barrel in December, up 6 per cent from November average of $84.26. The current financial year average price is $79.02 per barrel, up over 13 per cent from the FY09 average of $69.76.
