New Delhi, Sept. 13: The Centre tonight raised the price of diesel by Rs 5 a litre and restricted the annual supply of subsidised gas cylinders to six per family, signalling the launch of measures that carry the risk of a backlash but are intended at battling a perception of paralytic indecisiveness.
The price of diesel in Calcutta will rise to Rs 50.61 per litre from Rs 44.76 ' an increase of Rs 5.85 a litre. Local levies and transportation costs account for the additional increase.
The cabinet committee on political affairs, which met here this evening, also decided to cut the excise duty on petrol by Rs 5.30 a litre. But this will not have any impact on the retail price at the pump as the oil companies have been making a loss of Rs 6 per litre on petrol.
The decision to raise the price of diesel ' the fuel that powers trucks, trains and a rapidly growing fleet of cars as well as SUVs ' drew howls of protests from politicians who plan to stage demonstrations seeking a rollback.
The government appears to have kept some headroom for a rollback, going a notch above the Rs 4 hike recommended by the oil ministry.
Bengal chief minister Mamata Banerjee, nursing a mild fever, was "surprised" and lined up a march in Calcutta on Saturday but added that she had little option but to continue supporting the UPA government. ( )
The new diesel price has two components: Rs 3.50 per litre is the actual price increase; the excise duty on diesel, which is calculated as a percentage of the fuel price, has been raised by another Rs 1.50 per litre.
The supply of subsidised cooking gas will now be limited to six 14.2kg cylinders a year. With just six months to go before the close of this financial year, the government said it would allow only three subsidised cylinders per family.
All other cylinders would have to be bought at market prices. Indian Oil executives said the market price of a gas cylinder in Delhi would work out to Rs 747. According to a study, around 56 per cent of LPG consumers use more than six cylinders a year.
The oil companies' under-recoveries ' the portion of their costs that remains uncovered after fixing the retail prices ' will be reduced by about Rs 20,300 crore. It is estimated that the total under-recoveries of the oil companies would balloon to Rs 1.67 lakh crore by March 2013, higher than the Rs 138,541 crore in 2011-12.
This year's budget has capped the petroleum subsidy at just Rs 23,640 crore, leaving little scope for the government to bridge that abyss.
The diesel price hike is the first in a series of choreographed steps that the Manmohan Singh government is expected to take in the next few days. (See Business)
Congress leaders fell silent tonight but the party's core committee had yesterday approved the decisions.
Prime Minister Manmohan Singh, who chaired the CCPA meeting today, had convinced Sonia Gandhi yesterday that tough measures were unavoidable if welfare schemes had to be sustained, sources said.
Although some leaders argued for a Rs 17 hike for a litre of diesel to wipe out the under-recovery, Sonia did not agree. The LPG quota had been debated fiercely in the past and an agreement already reached but Sonia was keen on an eight-cylinder ceiling, not six, the sources said.
They said the Prime Minister was convinced that the only way to turn the hostile political tide was to pursue prudent decisions that would lift the economic mood.
But Congress leaders, worried about a popular backlash, have so far left it to the government to build its case. Only one spokesperson, Rashid Alvi, answered calls tonight. "The government would have taken this decision with great reluctance," he said.
The Centre has been under pressure from the RBI, economists and global credit rating agencies to take hard decisions dictated by economic pragmatism.
The rating agencies had warned the government that they could cut India's sovereign ratings to junk bond status which would raise the costs for companies looking to borrow abroad.
Economists and bankers hailed tonight's decisions and said the government had finally shown courage.
"It's a bold step towards fiscal consolidation and gives the Reserve Bank of India the freedom to take appropriate monetary measures," said C. Rangarajan, former RBI governor and chairman of the Prime Minister's Economic Advisory Council. He added that the diesel price hike would head off the risk of a credit rating downgrade.
"It is the first positive move by the Union government after a long period of inaction," said Shubhada Rao, chief economist at Yes Bank.
The price hike in diesel will stoke inflation though economists still have to work out its incidence. Rao said the cumulative impact on inflation would be about 65 to 70 basis points. (One hundred basis points make a percentage point.)
Inflation measured by the wholesale price index had eased to 6.87 per cent in July from 7.25 per cent in June. But the impact on the rate of inflation will be felt only after a lag of a month.
The RBI meets on Monday for its mid-quarter review of its monetary policy. It last cut interest rates by 50 basis points in April.