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Over The Barrel
Phew! It's over. Another painful round of petro price hikes, taking as much time to birth as a premature baby with all the attendant complications. The wailing has begun with the Congress and the UPA riven over a rollback, and it threatens to jeopardise the hard decisions the PM and the finance ministry had finally mustered enough courage to push through. The consumer will bear the brunt of this late birth in the form of higher inflation. Already the
WPI is inching close to 5 per cent. The delayed and indirect impact of the hike, apart from the direct impact of 0.3 percentage point rise in the index, will add about 1.2 points and push it way past the five per cent mark next month. That may push up interest rates; in fact, the RBI raised them last Thursday.
Hemmed in by protests from his own colleagues and party president Sonia Gandhi, finance minister P. Chidambaram has made assurances on keeping inflation in check. Economists feel the RBI will do anything to achieve that goal, if only to send the right message. A senior North Block official admitted the inflation threat is a major dampener for the 8 per cent GDP growth target for this fiscal. As a result, he said, there will be "mitigating measures through various mechanisms to keep it benign".
Before we shadow-box with the danger signals to the economy, it's important to understand the politics and the economics of the decision to hike petrol by Rs 4/litre and diesel by Rs 2. Sonia and the party clamoured for a rollback, petroleum minister Murli Deora rushed to the high command to clarify, there were heated arguments at the cabinet meeting and the supporting Left parties said they will protest publicly. There was even a discussion on whether prices can be rolled back by Re 1 by reducing the fixed component of excise duty. On that, the FM put his foot down and the rollback decision was deferred to another time. Despite the hike, Sonia came out with flying colours—the public perception is that she did try to intervene.
At the economic level, it's important to know that prior to the hike, refining and marketing psus were losing Rs 160 crore a day. By itself, the raise is too little and too late for these companies. Kerosene needs to go up by Rs 17.16 a litre and an LPG cylinder is still cheaper by Rs 115. Even petrol and diesel prices needed to go up by over Rs 10. This hike will earn oil psus only Rs 9,300 crore against a total unbridged gap of Rs 73,500 crore. But thanks to the package announced last Monday, oil companies are sulking less. It includes Rs 28,000 crore of bonds to be issued by oil companies, shifting to trade parity pricing from the current import parity mechanism that will help cut loss by Rs 2,200 crore and a cut in customs duty from 10 to 7.5 per cent. Even subsidy-sharing by producers has increased to Rs 24,000 crore, from Rs 14,000 crore last year, much to the angst of public sector oil major ONGC, which bears a major chunk of the burden.
More worrisome is the possible political economy fallouts of the hike. If the Left intensifies protests, the UPA may find itself fighting to push through long-neglected decisions, like a cut in food subsidy, FDI in retail, and reforms in banking and pensions. Second, the Left may pump up demands for duty cuts in petro products. On second thoughts, that might just be the best thing to happen to the oil economy.