The government is expected to significantly tone down an oil ministry proposal to raise fuel prices by 15-20 percent due to an electoral setback for the ruling party and inflation fears, officials and analysts say.
Last week, ministry officials proposed to raise petrol prices by 10 rupees, or 22 percent, and diesel prices by 5 rupees, or 15.8 percent, as crude prices soared to record highs, hammering state oil firms.
State-run refining and fuel marketing Companies import most of their oil but have to sell fuels at heavily discounted rates set by the government.
Analysts say fuel prices may now be raised only 5-10 percent and the government may soften the impact on oil retailing firms by issuing more bonds and cutting customs duty on imported crude, which accounts for 70 percent of domestic consumption.
On Friday, Oil Minister Murli Deora said a decision on fuel prices was expected within a week, but a top government official told reporters on Monday that the government may take longer, partly because the prime minister was not well.
"There is no political consensus on price increase. Ministries are ready but politicians are not," the official, who did not want to be identified, told reporters.
The ruling federal coalition led by the Congress Party suffered a big setback on Sunday as the country’s main opposition party, the Hindu-nationalist Bharatiya Janata Party, won the election in Karnataka, extending a winning streak ahead of a national vote next year.
"Given the political resistance of such a move, the hike, if any, is likely to be much lower than what the oil ministry is seeking," said Sonal Varma, an economist at Lehman Brothers in Mumbai.
Saugata Bhattacharya, economist at Axis Bank, said the government may raise fuel prices by 3-5 percent. "Given the state of cash flows of oil Companies, there will be a rise, but the quantum will be tempered," Bhattacharya said.
Analysts say crude prices, which rose above $133 a barrel on Monday due to lingering supply concerns from key producer Nigeria and a partial shut-in at North Sea oilfields, may rise further.
"We don’t know where prices are headed because the hurricane season is now coming. Any increase will have an impact on the Economy when inflation is rising," said V. Raghuraman, principal energy adviser at the Confederation of Indian Industries.
A. Prasanna, an economist at ICICI Securities Primary Dealership, said the price rise may not be substantial.
"We may see some stop-gap solution, including a nominal price hike," Prasanna said.
Fast rising prices of foods and metals have pushed wholesale price inflation to its highest in 3-1/2 years, topping 8 percent in mid March, and posing a major headache for the government.
Increasing fuel prices, a move being strongly resisted by the administration’s communist allies, would risk further alienating already unhappy voters.
India may reduce some duties on fuel to partly offset an increase in retail prices, the Economic Times reported, citing people it did not identify.
Oil Minister Murli Deora will meet Finance Minister Palaniappan Chidambaram today, the newspaper reported.
Refiners, including Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp., need government protection, the newspaper cited Deora as saying.
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