India Friday said gasoline prices will be now be
driven by the market, a
move which will help the government cut its budget deficit by saving on
subsidies, although it may stoke inflation.
State-run oil marketing companies, which now sell fuel products at
state-set
prices, will gain, as investors showed Friday by cheering on their
shares.
The deregulation will lead to an about INR3.50 per liter increase in the
price
of gasoline from midnight
Friday, Oil Secretary S. Sundareshan told a news conference.
The price of diesel will be deregulated later, but will rise by INR2 per
liter
for now.
Shares of the country's state-run oil marketing companies and
explorers--Indian
Oil Corp. (530965.BY), Bharat Petroleum Corp. (500547.BY), Hindustan
Petroleum
Corp. (500104.BY) and Oil & Natural Gas Corp. (500312.BY)--surged on
the
announcement.
Indian Oil closed 10.4% higher at INR377.30 and ONGC gained 6.4% to
1,254 in a
market down 1%.
Indian Oil, Bharat Petroleum and Hindustan Petroleum suffer revenue
losses as
they sell auto and cooking fuels at state-set discounted prices to help
the
government control inflation.
The companies are compensated partly by the federal government through
cash and
partly by state-run explorers through discounts on crude oil and
products. But
they have to bear some of the losses themselves.
"Even after all these changes, underrecoveries for this fiscal year for
the [state-run] marketing companies will be INR530 billion," Sundareshan
said.
Despite the deregulation, the government is retaining the right to
intervene if
global crude prices spike, Sundareshan said.
The government's decision will help more private companies open fuel
retailing
outlets in India and
allow existing players such as Reliance Industries Ltd. (500325.BY) and
Royal
Dutch Shell PLC (RDSA) expand their retail fuel businesses.
This is the second increase in auto fuel prices this year, after the
last one
on Feb. 27.
Diesel is sold at INR38.10 per liter in Delhi and
gasoline at INR47.93.
Cooking gas prices have been increased--for the first time since July
2009--by
INR35 per cylinder. The price of kerosene has been raised by INR3 per
liter,
the first hike since April 2002.
"The price hike is as minimum as possible," said Oil Minister Murli
Deora. "How long are we going to subsidize Mercedes-Benz cars?"
The move to deregulate fuel prices will lift some pressure off the
government's
subsidy burden, but it will add to the already high inflationary
pressure,
which could spur the central bank to raise policy rates aggressively.
The Reserve Bank of India could
increase rates within two weeks, ahead of its policy review meeting,
which is
due July 27, said Namrata Padhye, an economist at IDBI Gilts.
Analysts were expecting sustainable policy action from the federal
government,
rather than just a one-time price hike, because inflation--which rose
10.16%
from a year earlier in May, significantly higher than April's 9.59%--is
forecast to trend down in the second half of the current financial year
through
March 2011.
Also, oil prices aren't expected to rise much for the time being due to
high
crude oil inventories, showed a survey conducted by Dow Jones Newswires
on June
18.
India's
federal government wants to reduce its fiscal deficit to 5.5% of gross
domestic
product in the current financial year from a record 6.6% in the previous
year.
Reforms in fuel prices would help the government lower its fiscal
deficit and
raise funds via divestment in the sector.
"It [gasoline prices] can be increased every day, but we are not moving
to
that situation," Ashok Sinha, chairman of Bharat Petroleum, told
reporters.
"It will be revised every 15-30 days, the individual marketing companies
will decide on the price and time for hikes."