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THE government has increased the price of petrol by Rs 4 a litre and diesel by Rs 2 a litre with effect from the midnight of 1st July. Cooking gas and kerosene have been left untouched.

There is a hint of a cautious move to deregulate fuel prices in the government’s decision to hike retail prices of autofuels now. Also interesting is the timing of the move, on two counts. The West Bengal civic elections are over, and so crucial coalition partner Mamata Banerjee’s opposition to such a move will be muted. More significantly, the hike in autofuel prices on the eve of the Budget paves the way for the government to perform two kinds of fiscal reforms. One, to include fuel subsidies in budgetary accounting, instead of fudging the figures by counting oil bonds meant to finance fuel subsidies as off-budget items. Two, to keep the now expanded fiscal deficit down by reducing the amount of subsidy on retail fuels.

The last time autofuel prices were increased was on June 4, 2008, which was followed by two quick rounds of price reduction in December 2008 and January 2009, well before the general elections were announced, as global crude prices came down sharply. As a result, petrol got cheaper by Rs 10 a litre and diesel Rs 4 a litre.

The government is also considering to compensate state-owned oil marketing companies—IOC, BPCL and HPCL—through budgetary provisions. This will be a departure from the current ad-hoc practice of compensating them through oil bonds.

Fuel prices were increased after consulting UPA chairperson Sonia Gandhi and Prime Minister Manmohan Singh, oil minister Murli Deora said at a press conference.

Petroleum secretary RS Pandey said the price increase was “ad-hoc” and “partial”. The government has increased petrol prices by Rs 4 a litre and diesel by Rs 2 a litre despite public sector oil marketing companies (OMCs) losing Rs 6 on every litre of petrol and Rs 3.60 a litre on diesel, he said.

Asked to elaborate the term “ad-hoc” in the present context, the petroleum secretary said: “Ad-hoc means not a full kind of deregulated price.”

He hinted that the government may meet the revenue losses of OMCs for selling fuel at government-determined rates, which are often below cost, through a “budgetary mechanism”.

Mr Pandey said at the current crude oil price of Indian basket ($70.29 a barrel), the total revenue loss of OMCs is estimated at Rs 30,000 crore for 2009-10. OMCs are still losing Rs 15.20 a litre on kerosene and Rs 96.8 per cylinder on cooking gas, he said. The government hasn’t increased prices of cooking fuel as it is also used by the poor.

The revenue losses of OMCs will also be met through upstream discounts. “Their contribution will be not be more than what they had given in the past,” he said.

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