Petrol and diesel will cost up to Rs 3.73 per litre more, households will have to pay an additional Rs 35 per cylinder and poor man's cooking medium kerosene will be dearer by Rs 3 a litre from midnight.
In a major decision to bring petroleum products in line with market rates, the government today freed petrol from all pricing controls and hiked diesel prices by Rs two a litre, Oil Secretary S Sundareshan announced after the meeting of the Empowered Group of Ministers.
Even diesel prices will be eventually freed of all administrative controls, Sundareshan said.
The decisions, taken by the EGoM headed by Finance Minister Pranab Mukherjee, were timed appropriately to take advantage of relatively lower global crude prices, which are hovering around $77 a barrel. The decision will help to rein in the fiscal deficit, which is projected at 5.5 percent of the gross domestic product in 2010/11 and free up revenues for other programmes.
Besides, this would also help cut down on the government's huge subsidy bills, as also relieve the oil marketing PSUs of staggering burden on account of selling these fuels much below the market prices.
Sundareshan said that the government would, however, continue to "heavily subsidise" the cooking fuels.
Oil Minister Murli Deora had, on more than one occasion, briefed the Prime Minister Manmohan Singh and Mukherjee on the crisis that would befall oil PSUs if no decision was taken on hiking prices. He has asked states to lower sales tax on petrol and diesel to cushion consumers from the impact of fuel price hike.
The decision would cause core inflation, already in double digits, to shoot up further.
In May, WPI-based inflation provisionally entered double digits at 10.16 per cent.
State oil firms currently lose about Rs 215 crores per day on selling fuel below the imported cost. At present, petrol is being sold at Rs 3.73 a litre below its cost, diesel at a loss of Rs 3.80 per litre, kerosene at Rs 18.82 a litre and domestic LPG at a discount of Rs 261.90 on every 14.2-kg cylinder.
Impact on Transportation Sector
The Petrol rates have been hiked by Rs 3.5 per litre and the diesel rates have been hiked by Rs 2 per litre. This move has affected the transportation sector as a whole. The rickshaw fare has been raised by Rs. 2 from Rs 9 to Rs 11. It means if you travel twice by rickshaw daily then it costs you Rs 4 more per day which sums up to be Rs 120 per month. So for a family of four people its costs around Rs 480 more per month.
The Commercial vehicles owners have gone on strike since last night in order to protest against the hike in diesel prices which is cutting their pockets deeply as for commercial transport diesel is the direct raw material.
But freeing of petrol prices would reduce the Rs 74,300 crore deficits by about Rs 5,000 crore. A one rupee per litre hike in diesel prices would cut the losses by Rs 3,800-4,000 crore.
Impact on the Banking sector
The price rise will have an impact of 100 basis points in inflation as the first round of impact following the fuel price hike. The second round of impact could add another 30-40 basis points.
Inflationary pressures in the economy will build up leading to interest rate hikes. The fuel price hike has increased the probability of a rate hike before the July monetary policy review.
Also a high possibility of a rise in interest rates in the near-term.
And if not, then rate increases could be heftier by 50 basis points in July.There could be some relief on the fiscal side for the government. We are expecting a reduction of Rs 250 billion in under-recoveries.
Impact on the Auto sector
The government's decision to increase petrol, diesel prices is likely to impact growth of the automotive industry.The impact will be felt in the long run as the inflation rate, which will climb further in the wake of the decision, is likely to hit the purchasing power of potential buyers. Almost all the segments including cars, commercial vehicles, tractors, and two wheelers will get impacted
Fuel price hike will impact the overall running cost of the vehicle including the freight cost.
Some automakers believe that the hike will mean increased focus on alternative fuel for vehicles. The demand for LPG or CNG powered vehicles will gradually rise as a result.The impact will be felt more on fuel guzzling vehicles than on smaller cars, which are more fuel efficient. More manufacturers may launch LPG-driven vehicles as it will naturally attract a large amount of buyers.
The hike has got nothing to do with the long run as a person buying a car will still buy a car even if he has to pay that extra amount. Cost of rate of interest has a much higher impact on car buying decision than fuel hikes.
Impact on Common Man
The decontrolling of fuel prices which has led to a big hike in petrol, diesel, LPG and kerosene prices has multiplied the woes of the common man. While the industry has hailed the move, millions of people are criticizing the government's decision and the timing of the hike with inflation already at a record high.
Is the government right when it says it cannot go on subsidizing fuel prices? Why a hike when there has been no change in the international crude prices? Is this an attack on the common man? These are questions people are raising. At a time when inflation is at the peak, this petrol hike has agitated people across the country.
'We live in a country where Sim card is free and dal is sold at Rs 120;
Where politicians make a mockery of justice and people vote them to power;
Where law makers are all rogues and thieves;
Where it takes more than a LIFE to get justice;
Where it's a crime to be poor;
Where corporates have money to buy an IPL team but no money for the poor;
Where netas are garlanded with currency, and common man dies in a stampede where food is distributed.’
Also the price rise will lead to an increase in all the FMCG’s & the regular necessities affecting the common man the most.
IMPACT ON THE ECONOMY
The increase in fuel prices will help oil marketing companies cut under-recoveries by Rs 22,000 crores this year, thereby easing pressure on government finances and bringing down the fiscal deficit.
“These changes will help the fiscal and revenue deficits to decline,” finance ministry’s chief economic adviser Kaushik Basu said on Friday after an empowered group of ministers led by finance minister Pranab Mukherjee decided to free petrol prices and raise prices of kerosene, diesel and cooking gas.
The government has projected a fiscal deficit of 5.5% of the GDP in 2010-11, but finance secretary Ashok Chawla had earlier said it could shrink to 4.5% of GDP if fuel prices are deregulated and bonanza from 3G spectrum auction is factored in.
The lower under-recoveries will also help the stick to its borrowing target of Rs 3, 45,000 crores for the fiscal. It is scheduled to borrow 63% of its full year target between April and September.
There may be some short-term pain, but it will result in long-term gain. The fuel price hike will help the government cut down the subsidy bill and control the deficit.
We can sum up that the rise:
1) Will lead to rise in inflation sharply which is around 10.16 % already in double digit.
2) Will Lead to rise in prices in almost all sectors major sectors affected will be Transport, Auto, FMCG, Textiles.
3) The rise in LPG gas will cut the common man’s pocket deeply.
4) It will also have an impact on banking sectors as the hike may lead to rise in inflation which will urge RBI to rise interest rates thus affecting banks due to tightening of CRR.
5) The decision will help to rein in the fiscal deficit, which is projected at 5.5 percent of the gross domestic product in 2010/11 and free up revenues for other progammes.
6) State oil firms currently lose about Rs 215 crores per day on selling fuel below the imported cost. Thus it will help these companies to make profits.
Thus looking at the macroeconomic view the move is beneficial for the country and the Oil marketing companies, but is going to directly hurt common man who fights inflation day in day out.
Source - www.economictimes.indiatimes.com
www.rediff.com
Posted By - Chintan Dedhia
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