It was never going to be easy. A 10 per cent hike in petrol and diesel prices would hurt, and there was no way to sweeten it. It’s a tradeoff between the country’s long-term economic interests and the hit consumers take today.
That’s the message Prime Minister Manmohan Singh sought to drive home as his inflation-weary government on Wednesday announced the steepest-ever increases (in absolute terms) in government-administered fuel prices.
The hike — Rs. 3 per litre of diesel, Rs. 5 per litre of petrol and Rs. 50 per LPG cylinder — was unavoidable, but necessary to keep the country’s oil marketing companies from going bankrupt. But coming as it does at a time when the nation is battling a sharp spike in inflation, the decision triggered widespread resentment among consumers across the country. They will have to shell out more for travelling to work, running the kitchen and buying everything that needs a transport.
The Left parties promptly slammed the hike as “steep” and announced plans for a countrywide agitation for a week starting Thursday. The main opposition party, the BJP, called it “economic terror”.
Among the UPA constituents, the RJD demanded a rollback and the PMK a reconsideration of LPG price hike. Only NCP’s Sharad Pawar said there was no choice but to go for a hike.
The hike will hurt. Petroleum Minister Murli Deora admitted the revision in petrol and diesel prices could directly add half a percentage point to the inflation rate, which has already crossed 8 per cent. Analysts said the actual impact would be more as it cascades through other sectors.
The hike in diesel price alone could push transportation cost by 5 per cent, said S.P. Singh at the India Foundation for Transport Research and Training.
High inflation puts the economy’s growth momentum at risk, as it could lead to further hardening of interest rates and, in turn, slow down investments and expansion.
The prime minister, in an unusual address to the nation, urged people to see reason in the government's decision. "I would like the nation to remember that issuing bonds and loading deficits on oil companies is not a permanent solution to this problem," Singh said. "We are only passing on our burden to our children, who will have to repay this debt."
Although global crude prices have nearly doubled in the past year, the government has not allowed a corresponding increase in retail prices at home.
As a result, under-recoveries at oil companies have spiralled and could have crossed Rs. 246,000 crore in the current fiscal year, according to Deora. Most of them would have run out of cash by September, if prices were left unchanged, oil company executives have repeatedly said.
"Cutting down on the returns of our oil companies will choke a sector vital for the growth of the economy," the prime minister said. "In the long term, our country must have sound strategy for energy security." Wednesday's decision, which also included reduction in duties on a host of petroleum products and a likely issue of Rs. 94,000 crore in government loans, would help oil companies limit their under-recoveries to Rs. 29,000 crore this year.
"The measures are much more than we had expected," said Sarthak Behuria, chairman, Indian Oil Corporation, the country's largest oil retailer. The prime minister also reiterated the need to shed dependence on fossil fuel and stressed on energy conservation. His suggestion was promptly seconded by top business leaders.
"This is also a time, when we really need to take a very close look at India's energy efficiency and conservation measures," said ICICI Bank's K.V. Kamath, who also is the president of the Confederation Indian Industry. "Oil prices are expected to rule at high levels in the medium and long term... The necessity of a robust and well-organised public transport system in both urban and rural areas cannot be denied."
(With political bureau inputs)