New Delhi, May 23
Just a day after the budget session of Parliament ended, the government swung into action with a bold move to cut oil subsidies and support the rupee allowing public sector oil companies to raise petrol prices by Rs 7.50 per litre, the steepest hike ever.

State-owned oil firms IOC, the BPCL and the HPCL said they will raise petrol price by Rs 6.28 per litre, excluding local sales tax or VAT. The hike translates into Rs 7.50 per litre in Delhi. Petrol in Delhi currently costs Rs 65.64 a litre and after the increase it will be priced at Rs 73.14 per litre.

The petrol price hike had been pending for months now but had been stalled due to pressure from UPA allies, state elections and the Parliament session. Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee have repeatedly in recent months stressed on the need to cut oil subsidies. This is also the government’s signal that it is ready to take tough and bold decisions, immediately after completing three years in office as it has been criticised for policy paralysis for more than a year.

While petrol is technically deregulated since the oil companies are government owned, it has the final word in pricing decisions. The government’s hand has been forced by the plummeting rupee which is in a free fall mode and breached 56 today. Since crude oil forms the bulk of India’s imports, it had strongly argued that raising prices of petroleum products is essential to control India’s current account deficit, the difference between imports and exports which is the main reason for the rupee’s weakness along with the global risk aversion causing a flight to the dollar fuelled by economic problems in Europe and Greece

The steep hike in the petrol prices even though global crude oil prices have corrected may come in for criticism. However, the government may be angling to use it as a bargaining chip and prune the hike later if UPA allies protest. Since, diesel, cooking gas and kerosene are all politically sensitive, petrol remains the only product where there is some room for a hike but that will only increase the gap with diesel, driving even more the demand for diesel cars.

According to an Indian Oil statement, petrol prices were last revised in December 2011 when they were reduced by almost Rs 1. As a result, IOC has suffered a loss of Rs 2108 crore and the industry a loss of Rs 4651 crore. Since last price change, international oil prices have increased and US dollar -rupee exchange rate has shown further deterioration. While Indian basket of crude has increased by 3.5% from $109.23 per barrel to $113 per barrel, international petrol price has gone up by 14.5 per cent from $ 108.62 per barrel to $ 124.42 per barrel. USD-INR exchange rate has deteriorated 3.2% from Rs 51.50/$ to Rs 53.17/$. However, due to declining international MS prices during the current fiscal, under-recovery has shown a downward trend from Rs. 8.04 per litre in the second fortnight of April 2012 to Rs 7.17 per litre during May 1st fortnight, and further to Rs 6.28 per litre during current fortnight. The statement added that OMCs are suffering high level of under-recoveries on three sensitive petroleum products, namely diesel, kerosene and the LPG. The last hike revision in selling price of sensitive products was undertaken in June 2011.

As compared with last price change, current under-recovery on diesel has gone up from Rs 6.13 per litre to Rs 13.64 per litre, for kerosene from Rs 24.16 per litre to Rs 31.41 per litre and for LPG from Rs 331.13 per cylinder to Rs 479 per cylinder. At these rates, it is estimated that under-recovery on sale of sensitive products during 2012-13 shall be around Rs 1 lakh crore for IOC and Rs 1.86 lakh crore for the industry.

New Delhi, May 23
The UPA government’s decision to go in for the steepest-ever hike in petrol prices today evoked strong protests from both Opposition parties and allies, who have threatened to take to the streets against this move. But these protests will not impact the stability of the UPA government as its partners, including the mercurial Trinamool Congress chief and West Bengal Chief Minister Mamata Banerjee, have said they have no intention of exiting the ruling coalition.

Mamata Banerjee’s reaction to the petrol hike was on expected lines. She accused the UPA government of putting an additional burden on the common man while describing the decision as “unilateral and unjust.” Stating that her party had not been consulted on this matter, Mamata said the Trinamool Congress will protest against this decision.

At the same time, she declared that the Trinamool was not pulling out of the UPA government as such a move would lead to political and economic instability. “Our election commitment is to support the UPA for five years,” she maintained.

The Trinamool chief’s statement came as a relief to the beleaguered UPA government, which is currently battling a serious economic crisis which necessitated tough measures. Both Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee have held out several warnings in the recent weeks that "difficult decisions" would have to be taken on both spending and revenue mobilisation in the coming days. The PM had spoken on these lines yesterday when he released the UPA government’s annual report at a special function at 
his residence to mark its 
third anniversary.