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India Rules Out Diesel, Kerosene Price Hike

  • Anjana Pasricha

An employee fills diesel in a public bus at a fuel station in Kolkata, August 13, 2012.

An employee fills diesel in a public bus at a fuel station in Kolkata, August 13, 2012.

India has ruled out hiking the price of diesel, kerosene and other subsidized petroleum products for now. The government is under pressure to raise oil prices to reduce its massive fiscal deficit, but fears a populist backlash.

Suvikrant Maira, 35, is a private sector executive working in the booming business hub of Gurgaon. He prefers to run a car which uses diesel.

“Honestly its about economy, when you have outstation trips you want to make, petrol usually does not make economic sense there,” he said.

Diesel costs 40 percent less than gasoline. Diesel's price is heavily subsidized because it is used by the transport sector - trucks and buses. The government also subsidizes the price of cooking gas and kerosene.

Oil Minister Jaipal Reddy said Friday state-run oil companies are suffering billions of dollars in losses due to the subsidies. But he is ruling out an immediate price hike.

“We are of course facing a tremendous crisis of unprecedented magnitude. However there are no immediate plans [to raise prices],” he said.

The oil subsidies have increased hugely as energy consumption has risen in recent years. The finance and oil ministries have long advocated slashing fuel subsidies, particularly on diesel, to control the government’s fiscal deficit.

Officials point out that the consumption of diesel is not restricted to the transport sector. In recent years, it has also increased hugely among the middle and upper income groups, who do not need the subsidies.

Diesel is also used by private businesses and individuals to fuel generators, which are not uncommon in a country where power cuts have become the norm.

But observers say the government, already under pressure from growing corruption scandals, is concerned about a popular backlash if the prices of diesel and kerosene are raised.

The Congress Party-led government is also under pressure from its coalition partners. They fear an increase will raise freight rates and fuel inflation in a country where rising prices are already a concern.

However, economists warn that the implications of not slashing oil subsidies could be serious. Global ratings agencies have warned India of losing its investment grade status if it does not control its fiscal deficit.

D.H. Pai Panandiker, the head of the New Delhi-based economic policy institute, RPG Goenka Foundation, says the subsidy on diesel and cooking gas is a huge strain on government finances.

"It is hurting India’s economy in a major way. And if that [eliminating subsidies] is not done then the budget deficit will shoot up and the possibility of any improvement in investment is not there. So, it can make a lot of difference to growth going up or going down," he said.

Economists say new investment is urgently needed to give fresh momentum to an economy which has slowed to 5.5 percent compared to 8 percent a year ago.
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