Mumbai: The government has a lot on its plate right now from the free-falling rupee to the twin deficits which are spiraling out of control. But it dealt the biggest blow to the common man today by hiking petrol prices effective from midnight with the steepest ever increase of Rs 7.50 per litre.
The government had been building ground for this decision. It has bitten the bullet finally, a day after Parliament was adjourned and a day after the UPA presented its report card on its third anniversary.
While this seems to be the first serious attempt by the government to show that it is serious about getting back on path on fiscal consolidation, Govinda Rao, director, NIPFP says it is not enough.
"We will have to see on Friday, whether they are going to really increase diesel, cooking oil and kerosene prices as well because that will give some signal that the government means business in containing the subsidy bill and the fiscal deficit."
Chief economist at YES Bank Shubhada Rao says the hike was long overdue.
The government had decontrolled petrol price in June 2010 but oil companies had been warned not to go in for any further increase in the run-up to the assembly elections. High subsidies are putting pressure on the country's fiscal deficit. A rise in fuel prices appears necessary to cut down this subsidy payout.
According to the Ministry of Petroleum and Natural Gas, the under-recovery for oil companies, as on May 16, on every domestic cylinder is Rs.480. The daily under-recovery for the oil marketing companies, on diesel, LPG and kerosene, is Rs.509 crore. The IOC, on behalf of the other Oil Marketing Companies (OMC), too had, a few months ago, highlighted the need to increase petrol prices.
Shubhada Rao says the under-recoveries on diesel, kerosene and LPG was much sharper and needed to be addressed. "It is definitely a good decision keeping in mind the difficulties being faced by the OMCs," she says. She however adds that the move would have a miniscule impact on handling subsidiaries as its not adequate.
Nonetheless, she says it goes somewhat in giving an indication that the government will step-by-step perhaps begin to address the subsidy issue. "Its impact on inflation maybe miniscule because in terms of weightage it has a low weight on the WPI index," says Rao.
This hike is not going to be the end. The government had to increase these prices even as international prices in dollar terms had been cooling, mainly because the rupee has been losing its value, says Govinda Rao.
Diesel continues to not be deregulated, but whether or not the government will finally take a decision at the level of the Empowered Group of Ministers (EGoM) continues to be a question mark. Whether they will move on LPG also remains a question mark.
The subsidy bill on motor spirit is not a large sum. It is basically diesel and cooking gas that is really causing a lot more of trouble and we need to act on that front says Govinda Rao. "Not only because we need to contain subsidy, but you need to avoid distortions, you need to prevent adulteration. There are many reasons why you need to realign the prices."