Diesel ‘Reform’ More Harm Than Good

more-harm-than-goodPolitical parties and many analysts have described the recent cabinet decision to allow public sector firms to hike diesel prices from time to time as “atrocious” as it would have a “cascading” effect on the prices of other commodities. “People are already reeling under price rise. They expect relief,” an Opposition party spokesperson pointed out. The Government, instead of providing relief, is increasing prices, he said, adding: “First they raise rail fares and now diesel. This is atrocious”.
This is happening as the Government does not have any policy. There is “complete chaos”. “When diesel prices are raised, there is a cascading effect on other prices,” he said. Farmers would be the worst affected as they use diesel to run both pumps and tractors. It will increase costs of irrigation, tractors and other agricultural inputs. “Fertilizer prices will also rise,” he said. “By allowing oil marketing companies to hike diesel prices, they (the Government) are trying to hide facts from the people,” he said. “The Government’s argument that this was done to face the fiscal deficit cannot be accepted as this deficit is due to its mismanagement of the economy. People cannot be punished for that.”

Diesel Price Hike To Cost Rs 2700 Crore More A Year To Railways

The diesel price hike has put an additional burden of around Rs. 2700 crore a year on the cash-strapped Railways, a senior official said after the announcement was made. “We have to pay Rs. 10.80 per litre more now as the bulk price of diesel has gone up,” said the Railway Ministry official, adding, “The fuel bill will be about Rs. 2700 crore more per year due the latest hike.” The Government had yesterday allowed state-run oil majors to fix diesel prices on their own in order to reduce an expanding subsidy bill and budget deficit. Oil companies announced a dual price mechanism while hiking the rates. While the retail consumer will be paying 50 paisa more per litre, for bulk consumers the hike is more than Rs. 10 per litre. The national transporter paid about Rs. 10,000 crore during the last fiscal towards its fuel bill, which has been rising every year due to increase in fuel cost.
The diesel hike comes at a time when Railways is facing an acute financial crunch. Earnings from passengers and freight have failed to meet the target in the current fiscal. The annual plan allocation has also been reduced from Rs. 60,000 crore to Rs. 51,000 crore this year. As per the Government’s decision, bulk consumers such as Railways and state transport corporations will have to buy diesel at market price. Railways procure about 250 crore litre per year from oil companies for its fleet of 4500 diesel locomotives hauling both passenger and freight trains. Railways had recently hiked passenger fares in all classes to earn additional revenue of Rs. 6600 crore in a year. The passenger fare hike will come into effect from January 22.
The three oil PSUs – Indian Oil, HPCL and BPCL – supply fuel providing a subsidy of 30 paisa per litre as Railways is a bulk consumer of diesel. However, with the subsidy gone, Railways will have to buy fuel at market rate which is likely to hit hard the national transporter.

Why India’s Diesel Move Could Backfire



India’s decision to allow oil companies to raise diesel prices could have little impact on the country’s finances and also backfire in the polls, analysts say. Apart from a token indication of its intent for fiscal prudence, the Government’s move won’t do much for the fiscal deficit, not just this year but also next. And observers say the diesel price increase could be political suicide in an election year, particularly when the “common man” is already burdened with high inflation. India could see as many as 10 states go to elections in 2013 and early 2014, while federal polls loom before May 2014. “The voters would be livid by then and Congress should brace itself for the fallout,” said political analyst Prem Shankar Jha.
Following the Government’s decision, India’s oil companies raised diesel prices by 0.45 rupees a liter for general consumers and by over nine rupees a liter for bulk consumers, which include railways, defense and state road corporations. As such, Government spending on diesel through these consumers is set to increase. Bulk consumers make up about 18 per cent of diesel consumers. Deutsche Bank DBK.XE +0.20 per centsaid the net saving for the Government is “not substantial, and is subject to implementation risks,” flagging a common concern among economists.
Indian Oil 530965.BY +10.57 per cent Corporation, India’s largest fuel retailer by sales, says annual savings from the diesel price increase for oil marketing companies would be 150 billion rupees, or 0.15 per cent of gross domestic product, while the annual cooking subsidy would increase by 100 billion rupees, representing 0.1 per cent of GDP.
Diesel prices are a very sensitive issue in India, with any increase adding to already-high inflation through transportation costs. Most of India’s trucks and trains run on the fuel. India’s wide fiscal gap – 5.75 per cent of GDP in the fiscal year through March 2012 — is mainly due to the compensation that the Government pays for discounted sales of fuels, fertilizers and food.
New Delhi partly offsets fuel companies’ losses through cash subsidies. Retailers as well as their state-run crude oil suppliers need to absorb the rest of the losses, hurting their financial performance. New Delhi should bring in reforms that would sharpen the targeted subsidies to people in the lower income group, thereby reducing the chances of wastage, experts say, adding that it should also resolve supply side bottlenecks, including improving infrastructure, to deal with inflation. Nomura said the diesel price increase won’t have any impact on fiscal finances for this fiscal year through March. Finance Minister P. Chidambaram admitted as much, saying the Government isn’t factoring in any impact on the diesel price increase while calculating finances for this fiscal year, when it expects the budget deficit to be 5.3 per cent of GDP. And brokerage Kotak Securities says the fiscal deficit may come down by only about 0.07 percentage point next fiscal year.
– Romit Guha
Source : Real Time/Wall Street Journal




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