India closer to fuel price increase
Saturday, 24 November 2007
Jo Johnson in New Delhi and Joe Leahy in Mumbai, FT Syndication Service
Fuel price rises in India are imminent but are unlikely to lead to a meaningful reduction in a subsidy burden that will this year cost the government a sum equivalent to 2.0 per cent of gross domestic product, economists said last Thursday.
In an attempt to delay a growth shock and suppress a rise in inflation that would ravage the incomes of the poorest of the country's 1.1bn population, India has yet to increase prices of gasoline or diesel this year, even though crude oil costs have jumped by 55 per cent.
Manmohan Singh, India's prime minister, this week said he had asked a group of ministers to make a recommendation on fuel pricing to the government within a month, a move that came days after China jacked up its tightly controlled fuel prices.
"The chances are high that they'll move diesel and petrol up by 5-10 per cent, but I don't think they'll move on kerosene [known as 'the poor person's fuel'] with elections back to back over the next two years," said Chetan Ahya, an economist at Morgan Stanley.
"With headline inflation low, they're less worried about a return of inflation and realise that this might not be a bad time to do the price hike, but the magnitude will not be big," he said, alluding to the political constraints that have stopped the government from deregulating the sector.
India's wholesale price inflation of about 3.1 per cent masks the fact that the government, which controls 80 per cent of the petroleum products market by value, sets fuel prices at the equivalent of $54 a barrel.
Factoring in market prices, just a few cents away from $100 a barrel, would lift inflation by 1-2 percentage points, a level at which the central bank would want to sacrifice some short-term growth for medium-term monetary stability, economists say.
Doing nothing is not an option, however: the existing system of fuel subsidies is set to lead to a reversal of the hard-won fiscal gains of recent years, squeeze resources available for more productive government spending and encourage overconsumption of fuels.
Oil meets about 28 per cent of India's commercial energy requirements, a lower proportion than for many emerging markets. Abundant supplies of cheap coal are the dominant source of energy, accounting for 55 per cent of the mix.
Distortions caused by the subsidies are also wreaking havoc on important infrastructural industries, including India's airlines and private petrol retailers, threatening the country's chances of sustaining near double-digit growth.
"Increasingly, the airline industry has been in a state of deep financial strain," said Amitabh Khosla, executive director of the Federation of Indian Airlines. He said airlines collectively lost $500m last year and most were now operating at a loss.
The federation claims that the three state-owned companies that supply jet fuel, Hindustan Petroleum Corporation, Bharat Petroleum and Indian Oil, are being forced to cross-subsidise ordinary diesel and petrol by raising the price of aviation fuel, which is not subsidised by the government.
Fuel price rises in India are imminent but are unlikely to lead to a meaningful reduction in a subsidy burden that will this year cost the government a sum equivalent to 2.0 per cent of gross domestic product, economists said last Thursday.
In an attempt to delay a growth shock and suppress a rise in inflation that would ravage the incomes of the poorest of the country's 1.1bn population, India has yet to increase prices of gasoline or diesel this year, even though crude oil costs have jumped by 55 per cent.
Manmohan Singh, India's prime minister, this week said he had asked a group of ministers to make a recommendation on fuel pricing to the government within a month, a move that came days after China jacked up its tightly controlled fuel prices.
"The chances are high that they'll move diesel and petrol up by 5-10 per cent, but I don't think they'll move on kerosene [known as 'the poor person's fuel'] with elections back to back over the next two years," said Chetan Ahya, an economist at Morgan Stanley.
"With headline inflation low, they're less worried about a return of inflation and realise that this might not be a bad time to do the price hike, but the magnitude will not be big," he said, alluding to the political constraints that have stopped the government from deregulating the sector.
India's wholesale price inflation of about 3.1 per cent masks the fact that the government, which controls 80 per cent of the petroleum products market by value, sets fuel prices at the equivalent of $54 a barrel.
Factoring in market prices, just a few cents away from $100 a barrel, would lift inflation by 1-2 percentage points, a level at which the central bank would want to sacrifice some short-term growth for medium-term monetary stability, economists say.
Doing nothing is not an option, however: the existing system of fuel subsidies is set to lead to a reversal of the hard-won fiscal gains of recent years, squeeze resources available for more productive government spending and encourage overconsumption of fuels.
Oil meets about 28 per cent of India's commercial energy requirements, a lower proportion than for many emerging markets. Abundant supplies of cheap coal are the dominant source of energy, accounting for 55 per cent of the mix.
Distortions caused by the subsidies are also wreaking havoc on important infrastructural industries, including India's airlines and private petrol retailers, threatening the country's chances of sustaining near double-digit growth.
"Increasingly, the airline industry has been in a state of deep financial strain," said Amitabh Khosla, executive director of the Federation of Indian Airlines. He said airlines collectively lost $500m last year and most were now operating at a loss.
The federation claims that the three state-owned companies that supply jet fuel, Hindustan Petroleum Corporation, Bharat Petroleum and Indian Oil, are being forced to cross-subsidise ordinary diesel and petrol by raising the price of aviation fuel, which is not subsidised by the government.