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No more in fuel’s paradise

This sad state of affairs will persist as no government has the courage to desist from political fixation of oil prices to insulate their middle-class vote bank.

india Updated: Jun 04, 2008 21:04 IST

After endless deliberations, the UPA government has finally bit the bullet. Petrol, diesel and cooking gas prices have been raise by Rs 5 a litre, Rs 3 a litre and Rs 50 per cylinder respectively. This modest hike is obviously intended to minimise the impact of soaring global crude prices on the urban middle class ahead of crucial state elections, including a national one in 2009. True to form, the Left stands opposed to any increase in fuel prices. The last time petrol and diesel prices were raised was in February, when the Indian crude basket averaged $67 a barrel. Now it is has doubled to $124 a barrel, clearly warranting another round of increases. Without a greater degree of pass-through of global-to-domestic prices, the State-owned oil majors face bankruptcy.

The big question is whether their prospect of bellying up has been staved off with these hikes. Hardly. A simple way is to compare the under-recoveries in June and the actual price increases. For petrol, the revenue losses due to selling subsidised fuel had gone up to Rs 21.43 a litre while only a Rs 5 hike has been announced. In other words, the desired increase in petrol prices, say, in Delhi would have been from Rs 45.52 a litre to Rs 66.95 a litre, but the actual rise was limited to Rs 50.52 a litre. Similarly, for diesel, the losses of Rs 31.76 a litre are pretty close to the retail prices in the capital. For cooking gas, the under-recoveries are as much as Rs 353 a cylinder, but only an Rs 50 a cylinder hike has been announced.

So, the marginally higher fuel prices offset only a small part of the huge under-recoveries amounting to Rs 650 crore a day in June. The government has taken a hit in the form of lower taxes and duties, forgoing substantial revenues this fiscal. But the main burden will continue to be borne by the oil companies who will be paid as much as Rs 94,600 crore in bonds as compensation for selling fuel below cost. This sad state of affairs will persist as no government has the courage to desist from political fixation of oil prices to insulate their middle-class vote bank.

With the latest hike, we now know that there's a large portion of the bullet left to be consumed.