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Govt Allows Oil OMCs To Raise Diesel Prices

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In a mix of populist and reform measures, the government on 17 January virtually deregulated diesel prices allowing "small" hikes over a period of time while raising the cap on supply of subsidised cooking gas (LPG) to nine cylinders per household from six.
Industrialist Ananda Mahindra tweeted, if the minister's statement on oil cos flexibility to tweak diesel prices is the first step to price decontrol, then it's a bold and overdue step.
Shares in state-run oil marketing companies surged after the government authorised them to set diesel prices. Hindustan Petroleum Corp gained 5.4 per cent, while Bharat Petroleum Corp gained 3.6 per cent, and Indian Oil Corp rises 6.4 up per cent. Oil and Natural Gas Corp also rose 3.5 per cent.

Despite the virtual deregulation, commentators however, remained a little sceptical about how fast or whether it will be implemented. Since the government is the owner of these companies, it is expected to always have a say in the pricing. Also, while some hoped that the move will have some bearing on the fiscal deficit, others including the FM refused to calculate any possible fiscal benefit at this point.
Finance Minister P. Chidambaram felt India's budget-busting fuel subsidy bill for the current fiscal year ending in March could be expected to remain unchanged. "When they will make this small correction and how much, I can't say," he said. "So I am not factoring it."
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Vivek rajpal, strategist, Nomura said: "Given oil companies still need to take the approval from government authorities, I am not too excited about this news. Though the first market reaction is positive, I really doubt the sustainability of such a reaction based on this news, especially once markets take a look at details."
Rupa Rege Nitsure, chief economist of Bank of Baroda said "it's better to make step-wise adjustments rather than a one-off large scale adjustment. Earlier, when petrol prices were de-regulated, they hardly responded to market forces. Today's announcement will depend on how frequently and how genuinely OMCs respond to market forces."
Gautam Singh, economist, Anand Rathi Securities pointed out "even a one rupee hike in diesel will lead to an Rs 8000 crore reduction in subsidy. So, even a Rs 10 hike over a period of time, can have a Rs 40,000-45,000 crore impact on the fiscal deficit.

Price Hike & More
Diesel prices in all probability may be hiked by Rs 1.50-2.0 per litre in the first instance that can be as early as 17 January night following the decision taken by the Cabinet Committee on Political Affairs (CCPA) headed by Prime Minister Manmohan Singh.
The CCPA, however, left LPG and kerosene prices unchanged.
Price of diesel was last revised on September 14 when it was hiked by a steep Rs 5.63 per litre. At present, diesel costs Rs 47.15 per litre in Delhi. Subsidised LPG costs Rs 410.50 per 14.2-kg cylinder and any household requirement beyond the new limit of 9 cylinders will cost a near market price of Rs 895.50 per bottle. The increase in the LPG cap would mean an additional subsidy outgo of Rs 9,300 crore annually.
State-run oil marketing companies can now raise diesel prices in line with increases in global crude oil prices, oil minister Veerappa Moily said in a move that could help the government reduce its vast subsidy bill.
"Oil marketing companies have been allowed to raise diesel prices in small quantities over a period of time," senior oil ministry official G. C. Chaturvedi said. He did not give details about the time-frame.
The Government of India has also raised the cap on supply of subsidised Liquified Petroleum Gas (LPG) cylinders to nine bottles from six per year.
There will be no change in LPG and kerosene rates, Oil Minister M Veerappa Moily told reporters here after the meeting on Cabinet Committee on Political Affairs (CCPA).
"I am happy to inform the Cabinet Committee on Political Affairs has decided to raise the cap on subsidised LPG to nine cylinders per household in a year from existing six cylinders," he said.
Consumers will get a quota of five subsidised cylinders between September 2012 and March 2013 and from April 1, 2013, they will be entitled to nine cylinders per annum.

Drain On Budget
India's policy to subsidise retail prices of fuels such as diesel, which accounts for about 40 per cent of refined fuel consumption, is a major drain on the budget.
Ratings agencies threatened last year to strip India of its investment-grade credit rating if the government did not take steps to rein-in a widening fiscal deficit. Finance Minister P. Chidambaram has repeatedly vowed that the deficit will not exceed 5.3 per cent of GDP this financial year.
India imports more than 80 percent of its fuel needs. The government liberalised petrol prices in June 2010, but has often prevented them from being raised to reflect rising oil prices on global markets.
Fuel consumption in India rose 5 per cent in the last fiscal year, its fastest since 2007-08. Shares in oil marketing companies rose while bond yields fell after Moily's announcement.
The rupee rose to 54.47/4950 to the dollar from around 54.63/64 previously.
Last Word
A Prasanna, economist, ICICI Sec, said:  "It's kind of ambiguous. But if they're able to push through the increases over a course of six to seven months, it will improve the prospects for next year's fiscal deficit. However, it will be inflationary.
"This kind of signals there will be regular increases. It will push up inflation expectations, and will lead to second round effects."