PM backs freeing petrol price, says diesel will follow

Written by KG Narendranath | On Board Air India One | Updated: Jun 30 2010, 08:24am hrs
Prime Minister Manmohan Singh on Tuesday strongly defended last weeks hike in prices of petroleum products, saying these were much-needed reforms and subsidies on these products had reached unmanageable levels. He also indicated that there was no going back on the plan to make pricing of diesel also market-determined, as was done in the case of petrol.

People are wise enough to understand that excessive populism should not be allowed to derail the progress the country is making, and for which it is winning kudos internationally as well, Singh told media persons on board Air India One. He was travelling from Toronto to Frankfurt on his way back home from the Canadian city which hosted the G-20 summit on June 26-27.

Oil PSU scrips reacted to the PMs statement. With the average price of the Indian crude basket around $75 a barrel this fiscal, subsidies implicit in the prices of petroleum products were threatening to hit government finances badly. Earlier this fiscal, oil price rose to $80-81, which would have meant a subsidy bill of over Rs 1 lakh crore, a nightmarish prospect for policy-makers. On Tuesday, oil price stood at $78, still a very high level. If fuel prices were not hiked, the governments choice would have been between reneging on its promise to cut fiscal deficit to 5.5% of GDP for this fiscal and allowing OMCs to bleed.

Undaunted by the apparent show of unity among Opposition parties in their condemnation of price increases, Singh said that adjustments in kerosene and LPG prices were also necessary, considering the very high amount of subsidy implicit in the pricing structure of these items. We have taken due care to ensure that the poorer sections are affected to the least possible extent and that is why the attempt to keep kerosene and LPG prices under regulation, he said.

Singh asserted that the governments decision was not taken under pressure from any quarter. (Phasing out fossil fuel subsidies is a G-20 mandate on member countries). What we need is to do the right things for our country. The subsidies on petroleum products have reached a level which is not connected to sound financial management of the economy. So, it is (after) taking that into account that this decision has been taken to put some burden on the common people, but I think it is manageable, the Prime Minister said.

Even after price increases, there is a still a subsidy of Rs 227 per cylinder on cooking gas and Rs 14.8 on kerosene. Also, there still exists a small gap between the market-determined price and the revised price of diesel.

The government had admitted that price rise would have a direct impact on headline inflation by 0.9 percentage points, although it estimates that inflationary pressures would moderate by July. The diesel price hike is expected to have a cascading effect on prices of other goods.