Home > Crude Oil & Petroleum, Macro economics > What will be impact of fuel price hikes in India

What will be impact of fuel price hikes in India

The Empowered Group of Ministers (EGoM) finally mustered up the courage to free fuel prices from the administered price mechanism (APM), in spite of huge political pressure.  In April 2002, the government had completely dismantled the APM. However, due to a surge in crude oil and petroleum product prices since then, the government had to again take control. Regulation of petroleum prices resulted in huge losses for three entities. These include the upstream oil companies (namely ONGC, Oil India), the petroleum refining & marketing companies (including IOCL, HPCL & BPCL) and the government. The government subsidised the essential petroleum products in the form of cash or oil bonds to PSU petroleum refining companies.

The panel of ministers said petrol prices would be market driven, rising Rs 3.50 per litre, while kerosene prices would rise by Rs3 a litre. Diesel prices will rise Rs 2 per litre and will be freed up in the future. Cooking gas prices were raised by Rs 35 a cylinder.

The retail selling prices of petrol and diesel in Mumbai will increase to Rs 55.4 per litre and Rs 41.6 per litre, respectively in Mumbai. Prices of LPG (for domestic use) will rise to Rs 347 per cylinder while kerosene under PDS will be available to retailers at Rs 12 per litre.

According to Petroleum Secretary S. Sundareshan, the price hike is likely to result in Rs 23,600 crore reduction in under-recoveries of oil marketing companies to about Rs 56,500 crore in 2010-11. This will boost the profitability of the companies. However, it will also result in inflationary pressures on the Indian economy.

Reliance Industries, which operates the world’s biggest refining complex at Jamnagar, is expected revive all its pumps, which were shut down five years ago when the government started subsidising fuel sold by state firms.

Freeing up of petrol prices is not likely to have a severe impact on automobile sales in the near term. However, if the price of crude oil in the global market moves up sharply, we may see demand getting adversely affected. Rise in price of diesel is likely to result in higher freight rates as diesel prices account for nearly 55-60% of the total cost of a transporter. Crisil Research estimates freight rates to go up by around 3-4 per cent following the hike in diesel prices. 

A nice Question & Answer piece (Q+A – What would be the impact of fuel price hikes) is done by Reuters.

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