Petrol prices hiked by Rs 3.14 per litre from Friday

Last Updated: Fri, Sep 16, 2011 05:13 hrs

State-run oil firms have raised petrol prices by Rs 3.14 (nearly 5 percent) from midnight Friday, a move that eases their subsidy burden but adds pressure to stubbornly high inflation in Asia's third-largest economy.

Hindustan Petroleum Corp Ltd (HPCL), Bharat Petroleum Corp Ltd (BPCL) and Indian Oil Corp (IOL) all increased their petrol prices at 12 am Friday.

"With this hike, all the under-recovery associated with petrol ends and one can expect no more hikes in petrol in the near future," said DK Aggarwal, chairman and managing director of SMC Investments and Advisors Ltd.

Economists put the overall inflationary impact of the petrol price increase at between 4 and 15 basis points (0.04 to 0.15%).

Petrol is less widely used in India than diesel, and accounts for just 1.09 percent of the wholesale price index, the country's main inflation indicator, while diesel has a weight of 4.67 percent.

Headline inflation in India rose to 9.78 percent for August, data on Wednesday showed, its highest in 13 months, adding to expectations that the Reserve Bank of India (RBI) will raise interest rates on Friday for the 12th time since March 2010.

The soaring inflation and a slew of corruption scandals have put Prime Minister Manmohan Singh's government on the back foot and weakened its ability to push through reforms.

"It is never a right time in India for a petrol price hike, and what this shows is the government is prepared to take some unpopular decisions," said political columnist Amulya Ganguli.

"It has been on the defensive for a long while, and now is realising it cannot sit still and do nothing and must take the economic steps that it must," he said.

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IOC, BPCL and HPCL claim that they have lost Rs 2,450 crore this fiscal selling petrol - whose rates were freed from government control in June last year - below the cost price.

Nitesh Ranjan, an economist with Union Bank of India, said the impact of the petrol price increase would be minimal and is positive from the RBI's perspective.

"In tackling inflation, fiscal policy actions need to be in consonance with the monetary policy, else fiscal deficit will counter the moderating trend in aggregate demand," he said.

RBI Governor Duvvuri Subbarao has repeatedly called on New Delhi to improve its fiscal position in order to help manage inflation over the longer term.

"Considering the government's rhetoric and today's move, odds for a pause in policy rate has increased," Ranjan said.

Oil companies in India have been free since June 2010 to set their own prices for petrol, which is considered a rich person's fuel in India.

The price of diesel, which is widely used in agriculture and industry, remains set by the government, as are prices for cooking fuels.

The latest hike comes after a record 5 rupee hike in May.

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Besides petrol, the three firms claim they are losing Rs 263 crore per day selling diesel, domestic LPG and kerosene below the cost price.

Diesel, they say, is being sold at a subsidy of Rs 6.05 a litre, kerosene at Rs 23.25 per litre while domestic LPG rates are under-priced by Rs 267 per 14.2-kg cylinder.

"The industry lost around Rs 65,000 crore in the first half of the current fiscal on the three products and for the full year the revenue loss is estimated at Rs 121,571 crore at the price of Indian basket at USD 110 per barrel," an official said.

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