Why petrol price was hiked by over Rs 7 per litre

Government owned Oil Marketing Companies (OMCs) raised the price of petrol by Rs 6.28 per litre on May 23, 2012. After the inclusion of local taxes, this price hike amounts to an increase of Rs 7.54 per litre in Delhi.

India met 76 per cent of its total petroleum requirement in 2011-12 through imports. Petrol prices have officially been decontrolled since June 2010.

However, it has been argued by experts that prices of petroleum products have not been increased sufficiently in order to pass on cost increases to consumers. The inability to pass on international crude prices to consumers has affected OMCs more in recent months due to the depreciating rupee, which has further increased their losses. The total under recoveries faced by OMCs for diesel, PDS kerosene and domestic LPG for 2011-12 stands at Rs 138,541 crore.

It was recently announced that the OMCs will receive Rs 38,500 crore from the Ministry of Finance to partially compensate for the high under recoveries.

The prices of diesel, LPG and kerosene, which are responsible for the large under recoveries, are unchanged. Experts suggest that the price hike would have a limited impact on inflation, since petrol has a weightage of around 1 per cent on the Wholesale Price Index, whereas diesel has a weightage of around 4.7 per cent. The petrol price hike is unlikely to have an impact on the fiscal deficit, since petrol prices are technically deregulated.

Reports suggest that a panel of ministers is due to meet on Friday to discuss diesel, kerosene and LPG prices.

In a 2010 report, the Expert Group on "A Viable and Sustainable System of Pricing of Petroleum Products" (Kelkar Committee) observed that given India’s dependence on imports and rising oil prices, domestic prices of petroleum products must match international prices. It stated that price controls on diesel and petroleum in particular had resulted in major imbalances in consumption patterns across the country. This had also led to the exit of private sector oil marketing companies from the market, and affected domestic competition. Its recommendations included the following:

- Since petrol and diesel are both items of final consumption, their prices should be market determined at both the refinery gate and the retail level.

- An additional excise duty should be levied on diesel cars.

- A transparent and effective distribution system for PDS kerosene and domestic LPG should be ensured through UID.

- Price of kerosene and domestic LPG should be increased by Rs 6/litre and Rs 100 per cylinder respectively. The prices should be periodically revised based on growth in per capita agricultural GDP (for kerosene) and rising per capita income (LPG).