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India raises fuel prices PDF Print E-mail
Thursday, 05 June 2008

REUTERS, NEW DELHI - The government raised prices for petrol by 5 rupees and diesel by 3 rupees on Wednesday, the biggest increase in recent times, curbing losses at its state-owned refiners but fuelling inflation worries and a political backlash.

India's leftist parties, key allies of the ruling coalition, responded with a call for a week of nationwide protests and strikes.

"The increase in the price of diesel in particular will have a cascading effect on all-round prices," leftist leaders said in a statement, mounting more pressure on the government struggling to control inflation that is at a 3-½ year high of 8.1 percent.

Petroleum Secretary M.S. Srinivasan said the increase in fuel prices would raise inflation by 0.5 to 0.6 percentage points.

After 10 days of debate over the price increase, India also agreed to cut the import duty on crude oil to support refining and retailing firms like Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp.

A litre of petrol sold in New Delhi will cost 50.52 rupees ($1.19) per litre from midnight, up 5 rupees or 11 percent, and diesel will be 34.48 rupees ($0.81) a litre, up 3 rupees or 9.5 percent.

Analysts and local media had said petrol prices would rise 10 percent, while diesel would go up only 5 percent.

The government also raised the price of a cylinder of cooking gas, for the first time since 2002, by 50 rupees, or about 17 percent, but spared kerosene, used by many of India's 1.1 billion people for cooking and lighting.

With the hikes, India joins other Asian nations like Indonesia and Malaysia that have been forced to cut mounting subsidy costs by raising regulated domestic fuel prices, partly exposing their consumers to higher prices.

Although the higher prices may help temper fuel demand at the margins, analysts have said that rapid economic growth and rising salaries may blunt the effect of a modest price from India, where oil demand rose 7 percent last year, its fastest rate in 8 years.


PRICES STILL LAGGING

Even after the increase -- only its second in two years after a 3-5 percent rise in February -- fuel prices in Asia's third-largest oil consumer are lagging far behind the rally in crude, which hit a record above $135 a barrel two weeks ago.

Petroleum Minister Murli Deora said that if oil firms were to charge the international price of fuels, India's petrol price would have gone up 50 percent, while diesel and cooking gas prices would have doubled.

Global crude prices have fallen more than $10 since then, partly on fears over slowing demand growth from Asia, whose booming economies helped trigger oil's four-fold surge in the past 5 years.

India's oil ministry had lobbied for an increase of up to 20 percent in prices, but the move met stiff resistance as the Congress Party-led government faces state and general elections in the next 12 months.

Economists said higher prices would have serious implications.

Saugata Bhattacharya, economist at Axis Bank, said fuel prices would first raise inflation by 70 basis points and again by a comparable amount when the effect cascades to the transport and industrial sectors.

The reduction in customs duty on crude would add to fiscal woes, said Shubhada Rao, chief economist at Yes Bank.

"The fiscal scenario looks ominous. We expect the fiscal deficit to put pressure on government borrowing, Rao said.

Shares of the state oil firms rose up to 4.4 percent on the news, outperforming the benchmark index, which was in negative territory.

Shares of state refiners Indian Oil Corp, Hindustan Petroleum Corp Ltd and Bharat Petroleum Corp Ltd rose up to 4 percent after the announcement.

The 10-year bond yield rose to 8.13 percent, up two basis points from 8.11 percent earlier.

The partially convertible rupee was mostly unchanged at 42.60/61 per dollar.

The government fixes the price of petrol, diesel, cooking gas and kerosene to make fuels affordable and to control inflation.

It also issues bonds to state-run oil firms and forces energy explorer Oil and Natural Gas Corp to partly compensate them for selling cheap fuel.

But with imports accounting for 70 percent of India's oil consumption, the subsidy bill had risen, forcing the government to act

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