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Fuel prices cut to contain inflation

A day after Congress president Sonia Gandhi suggested that fuel prices be reviewed, the government reduced the retail price of petrol by Rs 2 per litre and of diesel by Re 1 per litre with immediate effect.

india Updated: Nov 30, 2006 18:15 IST

A day after Congress president Sonia Gandhi suggested that fuel prices be reviewed, the government reduced the retail price of petrol by Rs 2 per litre and of diesel by Re 1 per litre with immediate effect.

Petroleum and Natural Gas Minister Murli Deora made a formal statement in both Houses of Parliament following a decision on Tuesday night. He cited the commitment made by the government to protect vulnerable sections from oil shocks and the fall in international crude prices to $56-$58 per barrel -- from $75 in August.

The reduction in prices is bound to have a sobering effect on inflationary expectations. “Fuel-price reduction is good for the consumer and it has been done to contain inflationary trends and to that extent it is quite positive for the economy,” said V. Raghuraman, principal adviser, energy, Confederation of Indian Industry.

Following the reduction in oil prices, the burden on the government is estimated to be in the range of Rs 3,000 crore. Indications are that a large chunk of it will be passed on to oil companies, while the Rs 18,000-crore oil bonds issued earlier will take care of the Centre’s own quota of the subsidy burden.

“The reduction in diesel and oil prices will help the government in containing inflation below 5 per cent,” said T.K. Bhaumik, chief economic adviser, Reliance Industries Ltd. “The margins of oil-producing companies will definitely be impacted.”

The Petroleum and Natural Gas Ministry estimates that on petrol the profitability of oil companies will go down from Rs 3.67 per litre to Rs 2.

On diesel, state-owned companies will register losses of Rs 2 per litre as against the current Rs 1.01. The Federation of Indian Chambers of Commerce and Industry said: “The reduction in retail prices will hurt oil companies that are already smarting under pressure from reduced margins.”