India unexpectedly raised gasoline and diesel prices by as much as 10 percent on Wednesday, its first increase this year, passing some of oil's rally into an economy just beginning to find its feet amid a global recession.
The hike will aid margins for state-owned refiners forced to sell at government-set prices, likely further lifting shares in Indian Oil Corp (IOC.BO: Quote, Profile, Research, Stock Buzz) and its peers, and could be a prelude to greater free-market price reforms in next week's budget.
It will also trigger some increases in prices but the economy can easily absorb the rise as India's wholesale price index is forecast to have fallen 1.35 percent in the year to June 20, the third straight fall, according to a Reuters poll.
Petrol prices in Delhi will rise by 4 rupees a litre, while diesel rates will rise by 2 rupees a litre, Oil Minister Murli Deora told reporters. For a table on India's fuel price in recent years, see [ID:nDEL459859].
Prices were last raised in June last year, when the average price of India's crude imports was $113 a barrel, but they were cut in December and again in January as oil tumbled. U.S. crude oil prices CLc1 have more than doubled since a February low, with second-quarter gains the highest since 1990.
In view of the increase in the price of crude oil ... it has become inevitable to revisit the prices, Deora said.
Oil Secretary R.S. Pandey said oil firms would still suffer a revenue loss even after the rise, and this burden would fall mainly on oil producers like Oil and Natural Gas Corp (ONGC.BO: Quote, Profile, Research, Stock Buzz).
The government has not increased the price of cooking gas and kerosene to protect the poor and middle-class.
Deora said despite price the increase, oil firms were likely to suffer a revenue loss of 560 billion rupees ($11.7 billion) on sale of petrol, diesel, cooking gas and kerosene this fiscal.
CHINA, THEN INDIA
India's move comes just two days after China raised prices for a third time this year to their highest ever, meaning motorists and businesses in the world's fastest-growing oil consuming nations are facing extra cost pressure just as their economies have begun to show signs of picking up speed.
At about $3.50 a gallon for petrol, including India's heavy retail fuel taxes, New Delhi drivers are paying nearly $1 more than their American counterparts.
While India, China and many other developing nations chose to shelter their citizens with subsidies during most of oil's six-year rally to a record $147 last summer, some are now dismantling those schemes in an effort to prevent wanton or wasteful fuel use and temper demand.
Analysts feel the Congress party, emboldened by its recent unexpected strong election victory, may soon consider a proposal to end state controls on transport fuel prices, one of many important reforms expected from a government now unshackled from the constraints of its erstwhile Communist partners.
Deora declined comment on a possible move to lift government controls on fuel prices.
Now that India is feeling a sense of political stability and there is a more reform oriented government, this is the right time to allow the movement of petrol and diesel prices within a band determined by market forces, said Rupa Rege Nitsure, chief economist at Bank of Baroda.
The increase in prices may help reverse the fall in India's wholesale price index. This will translate into a 60 basis points hike in inflation. This also implies that inflation would move into the positive territory sooner than expected, said Shubhada Rao, chief economist, Yes Bank.
Pricing freedom would increase tax revenue and remove large subsidy bills, helping offset the cost of economic stimulus measures that have stretched public finances and widened the fiscal deficit to 6 percent of GDP.
India imports about 70 percent of the oil it consumes and accumulated a huge burden of subsidies as it kept prices artificially low when crude soared to its peak last year. (Editing by James Jukwey)