Business, Economics and Jobs

India hikes petrol prices to stem rupee's crash, angering citizens


A crowd of motor-cyclists queue at a petrol pump to fill their vehicles after the announcement of a 7.50 Indian rupee price hike in petrol by the government in Jodhpur on May 23, 2012. Indian state-run oil firms Wednesday announced the sharpest hike in petrol prices in nearly a decade to offset growing losses caused by subsidised rates, rises in the international oil price and a plunging rupee. The increase was put at 6.28 Indian rupees (11 US cents) per litre which, when taxes are included, will mean a 7.5-rupee hike for consumers in cities such as New Delhi.

India hiked petrol prices in an attempt to stop the rupee's plunge and bring the economy back on track late Wednesday, but the move has outraged citizens and united the opposition and his Congress Party's coalition partners against Prime Minister Manmohan Singh.

According to NDTV:

"The hike has prompted calls for a rollback from leaders who are key to the government's survival - [the Trinamool Congress'] Mamata Banerjee,[the Dravida Munnetra Kazhagam's] M Karunanidhi and [the Samajwadi Party's] Mulayam Singh Yadav. Even Congress heads of government like Sheila Dikshit are upset, indicating that the price hike may once again position the Congress vs the government, and prompting speculation of whether a partial rollback may have been built into the hike."

Singh's bold maneuver comes amid accusations of policy paralysis, following his December decision to place on hold a move to open India's retail sector up to foreign direct investments from megastores like Walmart and Carrefour -- which was forced upon him by fierce opposition from Banerjee's Trinamool Congress. So it will be almost as difficult for him to backtrack as it will be to push forward.

Meanwhile, the increase in prices could result in an uptick in inflation, which is already at uncomfortably high levels, considering that the vast majority of Indians remain very poor and therefore sensitive to the smallest price increases. 

However, India's Economic Times newspaper writes that there's not too much to worry about on that score:

"The sharp increase in petrol prices will have a marginal impact on inflation but any increase in diesel and cooking gas prices may hurt, experts said on Wednesday . Oil marketing companies on Wednesday raised petrol prices by Rs 7.50 a litre, adding to the anxiety of consumers and raising expectations that the increase will make life difficult for the common man."

Nevertheless, with the rupee still tumbling in early trade Thursday, a similar hike in diesel prices may be necessary. And some are calling for the complete decontrol of oil prices to avoid similar shocks from sudden, one-off adjustments.

As one editorial puts it:

"If prices go up by small amounts every now and then, the price change required would never be so steep. But this does not happen because the government retains effective control over prices even after nominal decontrol."

The reason? India nominally relinquished control over petrol prices in 2010, allowing private players to charge as much as they like. But it continues to subsidize state-owned companies, so the government is still effectively setting the retail price.  (At one point, Reliance simply refused to sell petrol at its pumps, since it would have to take a loss to match the government's prices).

"Political expedience guides price changes. Further, because of administered pricing of diesel and reimbursement of retailing losses only to state-owned oil companies, there is cartelisation rather than competition in fuel retail. Subsidising petro-fuels is not something that India can afford: this subsidy accounts for a sizeable part of the fiscal deficit and drives up the current account deficit."