India set to raise fuel prices, inflation a worry
Monday, 26 May 2008

Reuters, New Delhi- India is set to raise petrol and diesel prices to keep pace with crude oil's record run but the move will fuel inflation, heaping more pressure on a government struggling to calm prices ahead of elections.

Crude oil's surge has hurt consumers around the world and countries such as Indonesia are being forced to raise state-controlled prices. China said on Thursday it would retain controls on fuel prices, denying rumours about deregulation.

"A fuel price hike is inevitable," Indian Petroleum Secretary M.S. Srinivasan told reporters on Friday, adding that the oil ministry was also seeking tax changes to help Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp, which are forced to sell fuel below cost.

India sets the heavily discounted prices at which fuel is sold in order to help fight inflation and protect hundreds of millions of poor people from price shocks.

It partially compensates oil retailers by issuing oil bonds to them, which they can either hold as assets or sell in the market, while upstream companies share some of the burden.

The government, which faces a string of state elections this year and a national poll by May 2009, is worried that higher fuel prices will stoke inflation, already at its highest level in 3-½ years, topping 8 percent in mid-March.

"We are watching the (inflation) situation carefully. More steps will be taken as and when needed," Finance Minister Palaniappan Chidambaram told reporters.

The government has strived to contain inflation with tough restrictions on exports of rice and duty cuts on some imports, while steel firms have been firmly told to freeze prices for three months.

But with oil above $130 a barrel and losses at state energy firms mounting, the government has little option but to raise retail fuel prices and risk the consequences.

India's communist parties that shore up the ruling coalition issued a statement that they continue to oppose any increase in fuel prices as they will hurt the poor.

"We need to take immediate steps to save oil companies and I have discussed the issue with the prime minister last night," Oil Minister Murli Deora said. Later, though, he suggested that the government may take a week to act.

The cost of the crude oil India imports has doubled since June 2006 but, after a series of retail price revisions, fuel costs less now than it did two years ago. Prices were last raised in February when petrol was increased by 4.6 percent and diesel by 3.3 percent.


The chairman of the prime minister's Economic Advisory Council, C. Rangarajan, said the government faced a big dilemma over raising fuel prices, but analysts said the government would not be able to skirt the issue.

"We expect a higher fuel price revision. A token revision will be meaningless. It's completely getting out of hand," said Shubhada Rao, chief economist at Yes Bank in Mumbai.

"If you want fuel companies to survive, a certain amount of hike is difficult and unpalatable, but inevitable," she said.

HPCL's director for finance, Bhaswar Mukherjee, said on Thursday that the company was in talks with bankers to raise its borrowing limit to bridge the gap between soaring input costs and frozen fuel prices.

Economists said oil firms faced liquidity problems as they had to keep paying their suppliers while government compensation in the form of bonds came with a lag.

"This practice of keeping domestic prices suppressed and not allowing the pass-through of global prices is basically becoming unsustainable," said A. Prasanna, an economist at ICICI Securities Primary Dealership.

The prospect of some relief for the state firms, which are suffering a combined revenue loss of 5.5 billion rupees ($128.5 million) a day, helped their battered shares rise on the Bombay Stock Exchange.

IOC closed up 3.2 percent, HPCL rose 3.5 percent and BPCL ended up 3.8 percent, while the benchmark index fell 1.5 percent to its lowest in five weeks on inflation worries. The refiners' shares have fallen by a third to a half this year.

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