Thursday?s hike in diesel prices of R5 per litre together with the cap on six cylinders of LPG per household per year might seem like bold moves from a government struggling to push through reforms and new policies. But with the price of crude oil already at a high $117 per barrel, and given chances of it running away in the wake of abundant global liquidity, they won?t help too much when it comes to deflating a ballooning oil subsidy bill. Before the increase on Thursday, oil marketers were making losses of close to R18 per litre on diesel; with that gap having narrowed somewhat, OMCs will save some R20,300 crore. However, assuming the price of crude oil averages $110 a barrel this year, gross under-recoveries, on account of diesel, kerosene and LPG, could end up in the region of R1,67,000 crore. That would be way higher than last year?s R1,38,541 crore and, consequently, the government?s share of the tab too is likely to cross R1,00,000 crore, up from last year?s R83,500 crore.
Given the maths, the government?s assumption of estimated subsidies on diesel, kerosene and LPG in 2011-13, of R43,580 crore, seems totally out of sync with reality. Even with the savings coming from the latest hike in diesel prices, the fiscal deficit is expected to exceed the targeted 5.1% of GDP by a wide mark, with consensus estimates putting the deficit closer to 6%. Which is why the rating agencies, while acknowledging the government?s first steps to rein in the fiscal deficit, will look for more action on these lines. The attempt to narrow the price differential between petrol and diesel should pay off over time, curbing consumption of the latter. In the near term, however, the price hike will add an estimated 125 basis points to inflation; the indirect impact of the diesel price hike alone is pegged at 40 basis points. Which is why some economists believe that headline inflation could be nudging 9% by the end of the year?WPI for August came in at a fairly high 7.55%?especially if there are further increases in electricity tariffs. That is bad news for an economy grappling with a slowdown; the IIP data showed a deceleration in spends on staples and it?s possible that discretionary spends on items like cars and two-wheelers could taper off sharply. It also makes life extremely difficult for RBI, which wants to support growth but needs to first fight inflation.
