Petrol prices in India a result of foreign policy

Yesterday the inevitable large increase in prices of petrol was declared by oil companies. NDTV reported:

The single largest hike in petrol prices – of Rs. 6.28 per litre, exclusive of taxes – has led to a nationwide outrage with the common man and the government’s allies fuming alike over the issue. The new prices came into effect from midnight.

In Bhopal TOI reported:

Petrol prices in the city will become costlier by about Rs 9.51 per litre following the hike in prices affected by the government. Residents will have to shell out Rs 79.63 for a litre on petrol from Thursday.

The Mumbai edition of TOI ran the front page headline news:

After adding state taxes, petrol will cost Rs 73.18 a litre in Delhi, Rs 78.57 in Mumbai, Rs 77.88 in Kolkata and Rs 77.53 a litre in Chennai. This marks an increase of around 10% and puts a squeeze of roughly Rs 6,000 a year on a family that spends an average of Rs 5,000 per month on petrol.

This is the first upward revision in petrol price since November 4, 2011. The highest increase so far has been by Rs 5 per litre. State-run oil marketers twice raised prices by this amount — on May 15, 2011 and May 24, 2008 when petrol price crossed the Rs 50 a litre mark for the first time.

Opposition politicians immediately started protesting “the anti-people policies of the government”. However, the petrol price rise was inevitable, given the US sanctions against Iran, and the consequent pressure on China and India to stop importing cheap Iranian oil. Can it be ruled out that the resulting toll on our economic growth rate foreseen by the US government? As soon as that state department action was taken, this price rise was anticipated, and, in fact, several state governments have prepared for it by changing their tax structure.

Some politicians are asking for immediate changes of this kind. NDTV reports:

Slamming the petrol price hike, MDMK leader Vaiko said that the Tamil Nadu government should reduce the 27 per cent Value Added Tax (VAT) on fuel to minimise the impact.

Moneycontrol adds:

Under pressure from its allies, the Opposition and the public over the steep hike in petrol price, the Congress has asked all its state governments to cut taxes on fuel prices. The move comes after the Opposition made it clear that it would launch nation-wide protests over Wednesday’s Rs 7.50 hike in petrol price.

If the Congress-ruled states follow the diktat, the states that are likely to benefit are Delhi, Haryana, Kerala (coalition), Manipur, Rajasthan, Uttarakhand, Maharashtra (coalition), Arunachal Pradesh, Mizoram, Jammu and Kashmir (coalition), Andhra Pradesh, Meghalaya, Assam, West Bengal (coalition).

Reports say that the Uttarakhand government has already announced a tax cut.

India Today reports the views of the oil companies:

Top [oil marketing company] Indian Oil Corporation (IOC) sources told Headlines Today that the hike was not enough to fully offset under recoveries.

Even after nearly Rs.7.50 hike on per litre of petrol, OMCs say they would still be taking a hit of Rs.1.50 per litre.

They cited the sliding rupee as one of the major reasons for this situation as it would neutralise their gain from price hike. OMCs had indexed a loss of around Rs.8 per litre when dollar was at Rs.52. However, the dollar has now crossed the Rs.56 mark.

OMCs plan to meet Petroleum Minister Jaipal Reddy next week. They feel that if tax structure was rationalised by state governments, such steep hike would not be required. Till then they have been advocating keeping petrol prices regulated.

Moneycontrol follows up the story:

Consumers may be crying hoarse about the steep hike in petrol prices, but brokerages say had there been a simultaneous hike in diesel and liquefied petroleum gas (LPG) price, oil marketing companies (OMCs) would not have raised petrol price by 11%–the highest ever in the past two years.
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Petrol, among other fuel products is the only commodity which was de-regulated in June 2010; yet state run oil marketers like Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL ) and Indian Oil Corp could not hike its price due to political differences and were suffering a loss of anything between Rs 8-Rs 10 per litre on the sale of this product.

Also, petrol is the only commodity for which these companies do not get any subsidy since its price is not determined by the government as is the case with diesel and LPG. According to at the back of the envelope calculations, OMCs have taken a hit of around Rs 1.5 lakh crore in financial year 2011-12 due to selling fuel products below cost.

So it is possible that the companies will announce a calibrated hike in the remaining petroleum-based products and a simultaneous partial rollback in the petrol prices. The Hindu reports a piece of news which may have something to do with this:

Oil Minister S. Jaipal Reddy on Thursday cut short his official visit to Turkmenistan by a day to be in the national capital to field questions on the steepest ever increase in the fuel price.

Mr. Reddy, who was to return after signing a pact to buy natural gas through the US-based Turkmenistan—Afghanistan —Pakistan—India pipeline, was to return here Friday evening. He is now returning Thursday evening, sources privy to the development said.

Besides defending the oil companies’ decision to raise the petrol price, Mr. Reddy’s availability in the national capital was required for a high—powered ministerial panel meeting likely on Friday to discuss raising diesel and domestic LPG prices.

The markets have been very favourable to this move, report Moneycontrol:

The BSE Sensex gained more than 200 points while the NSE Nifty surpassed the 4900 level on broadbased buying. Banking & financial, oil & gas, technology and metals stocks led the rally in afternoon trade.

The BSE benchmark rallied 217.13 points or 1.36% to 16,165.23 and the NSE benchmark was up 65.90 points at 4901.55. The Indian rupee too somewhat recovered from day’s low of 56.31 a dollar to 56.09 a dollar, but still down 9 paise as compared to previous close.

State-owned oil & gas producer ONGC shot up over 4% on hopes that government may hike diesel price. Sources indicated that oil ministry has been pushing for Rs 5/litre rise in diesel. Oil marketing companies yesterday raised petrol price by Rs 6.28 a litre (excluding tax). HPCL and IOC were up nearly 1% while BPCL went up 2%.

India with US and Iran: a fine balancing act?

IE reports on Hillary Clinton’s visit to India:

Pressing India to further reduce oil imports from sanctions-hit Iran tops the agenda of US Secretary of State Hillary Clinton who flew into Kolkata today at the start of a three-day visit to India.

The US has been urging India and other countries to slash oil imports from Iran aimed at stepping up pressure on Tehran to comply with international demands over its nuclear programme.

India, which imports 80% of its crude oil and relies on Tehran for 12% of those imports, has said it needed to continue to buy Iranian oil to meet its domestic requirements.

Though India has publicly not said it was aiming to cut back on oil imports from Iran, the country’s top oil importers have been pushed to reduce Iranian oil imports by 15-20 per cent.

Crude imports from Iran fell to 18.5 million tons in 2010-11 from 21.2 million tons in 2009-10. Last fiscal (2011-12), Iranian oil imports dropped to less than 16 million tons. This year they may further come down to 14 million tons.

The US holds out a threat of sanctions against India and China if they continue to buy Iranian crude. Now India needs the US as a friendly trading partner, just as the US needs India as an ally next to China’s borders. Is this the reason for the timing of a visit by a Iranian trade delegation?

Z News reports:

An Iranian mission will start a six- day trip to India on Sunday for talks to promote trade ties with the South Asian country, the semi-official Fars news agency reported.

The delegation”s trip, covering New Delhi and Mumbai, is aimed at expanding trade relations and exploring “new avenues of mutual cooperation” with India, said the report.

During the visit, Tehran Chamber of Commerce is due to sign several memorandums of understanding with the Associated Chambers of Commerce and Industry of India as well as Indian export organizations.

According to the report, India buys around 11 billion US dollars worth of oil from Iran every year, making Iran its second largest crude oil supplier after Saudi Arabia. However, India only sells Iran 2.7 billion US dollars in goods every year.

Iran and India have worked out a deal, under which New Delhi pays for almost half of its Iranian oil imports in rupees, and the rupee payments will be used by Iran to buy Indian goods. By this means, both countries hope to achieve the bilateral trade target of 25 billion US dollars over the next four years.

Is the elephant learning to dance?