New Delhi, January 16
As political opposition to the steep hike in petrol mounts and the public at large not amused with the idea given that household budgets are already stretched with onions and milk, the government faces a very difficult choice in coming months with international crude oil prices set to cross $100 a barrel.

The problem is acute since India imports almost 80 per cent of crude oil for domestic demand of petroleum products. According to Petroleum Ministry estimates, the government and PSUs share the burden of higher under-recoveries during 2010-11, estimated around Rs 70,000 crore against about Rs 46,000 crore in 2009-10.

As per estimates for December, the oil marketing companies are incurring under-recovery of Rs 4.11 per litre on the sale of diesel, Rs 16.88 per litre on PDS kerosene and Rs 272.19 per cylinder on domestic LPG.

The UPA government and the ruling Congress are likely to take the line that petrol pricing was freed in June last year as per the recommendations of the Kirit Parikh committee and state-owned oil companies are now free to fix prices depending on global prices and domestic demand.

However, consumers do not like the idea of frequent price hikes whatever the mechanism and ultimately in their eyes the buck stops with the government as the oil companies are government controlled and decision on prices still broadly remains a political call.

This also puts into the focus the flip side of economic reforms. While economists argued that oil pricing should be free and the cost should be borne by the end user as it would improve the financial health of the oil marketing companies like Indian Oil, Hindustan Petroleum and Bharat Petroleum, consumers find it a bitter pill to swallow. Petrol prices are up Rs 5.50 within a month.

Politics is already heating up over the steep hike in petrol prices announced on Saturday with the Opposition parties like the BJP, CPM and even UPA allies like Trinamool Congress and JD (U) slamming the government and demanding a rollback. They argue that prices are going up because of the government policies and 50 per cent of the petrol price is basically taxes of various kinds.

Global equities house, Nomura, estimates that India along with Pakistan will be among the countries in Asia most affected by increase in oil prices in terms of impact on GDP. “The Achilles’ heel for Asia has always been energy and, more recently, food. The 2007-08 Goldilocks growth rally in stocks was grounded as high inflation prompted a succession of Asian rate hikes just at the same time. Ironically, while higher food prices raise the prospect of income disparity and social unrest, energy prices undermine the economy by acting as a tax on growth”, it said in a recent research note.

It says with higher energy prices, corporates experience a contraction in margins while consumers experience a drop in discretionary spending as more money is spent on daily necessities. Overall higher energy prices raise inflation and subdue growth.

Worried over under-recoveries on fuel sales, oil marketing companies have demanded the abolition of customs duty on crude oil to avoid a further increase in prices.

Petrofed, an oil and gas industry body, has asked the government to reduce the customs or import duty on crude oil to zero from 5 per cent at present.

It also wants the customs duty on diesel slashed to 2.5 per cent from 7.5 per cent at present, along with a reduction in the specific duty imposed on the most-consumed fuel in the country, a hike in prices of which would have cascading effect on already high inflation.

Globally as worries loom over crude hitting the $ 100 a barrel mark, some oil producers like Iran, Libya, Venezuela and Ecuador have said that the $100 mark is alright and there was no need for urgent intervention from the oil producers body, OPEC.

The Petroleum Ministry initiated major pricing reforms in June last year. While petrol prices were made free, an in-principle decision was taken for de-regulation of diesel prices along with marginal hikes in LPG and kerosene.