The Government raised diesel prices by Rs. 3 per liter yesterday. And LPG goes up by Rs. 50 per cylinder, and kerosene by Rs. 2 per liter.
Diesel in Delhi will still cost about 30 rupees less petrol, which is now at Rs. 71+ per liter. The increase in prices is about 10%, and much deserved, because the last diesel price was one year ago. Then, the price of crude oil was $80 per barrel, and it’s over $110 today, a hike of over 30%.The 10% does very little, really.
This, they say, will reduce the losses at oil marketers (HPCL, BPCL and IOC) which have lost Rs. 45,000 cr. in the last quarter. Just the price hike will result in an increase in revenue of 21,000 cr.
Also, the government has removed crude oil duty (was 5%), reduced petrol and diesel duty to 2.5% (was 7.5%) and diesel excise from Rs. 4.6 per liter to Rs. 2 per liter. Excise is what is paid when you make diesel here, and duty is the levy when you import it.
The duty cuts will reduce government revenue by Rs. 49,000 cr., it seems. We import about 1 billion barrels of crude (or equivalent petrol/diesel) per year, for which a 5% levy would have given the government Rs. 20,000 – 25,000 cr. Perhaps the rest comes from the diesel excise cut.
The 49,000 cr. is a HUGE chunk of government revenue; at least 5% of it. This will increase the deficit by that much, and probably more as people consume lesser. The rest will have to be financed, though because of rising GDP, the percentage of GDP that the deficit is, will probably be low.
Overall PSU oil losses are supposed to be 120,000 cr. today (Rs. 1.2 trillion) inspite of this package.
My view: Much needed hike. Very late. Very little. It won’t change much economics. They should have done more and after the backlash, retraced. All parties that are not the congress are crying, but if they were in power they would do the same thing.
This will increase inflation in the near term. But it will bring down consumption and demand. You gotta hurt, folks, for this crap to stop. We have to cut down demand, travel, discretionary expenses, because demand is now firmly driving inflation.
Now if the RBI were to stop printing money we might actually get some respite from inflation, but it still continues to do so. Anyhow, the result is that we pay more, because there are more rupees out there.
For the markets, this is negative of course. Watch Tata Motors.