<div>Diesel prices will be hiked by 40-50 paise per litre every month till losses on the nation's most used fuel are completly wiped out, Oil Minister M Veerappa Moily said on 1 February.</div><div> </div><div>The government is aiming to raise the price of subsidised diesel in small amounts every month to prop up public finances without causing a popular backlash before the 2014 polls. </div><div> </div><div>Until further orders, oil marketing companies can increase it (diesel price) by 40-50 paise (per litre) every month," the oil minister told reporters in New Delhi.<br /><br />The government had on January 17 decided to move towards deregulating or freeing diesel prices from state control and gave powers to state-owned oil firms to raise prices in small measures every month till all of their losses are wiped out.<br /><br />Fuel subsidies are a drain on India's finances and the government is struggling to bring the deficit within a target of 5.3 percent of gross domestic product for the financial year ending March. India is the world's fourth biggest oil importer. India imports 80 per cent of the crude it refines, about 3.7 million barrels per day. Benchmark Brent crude prices were at their highest annual average on record last year at around $111 a barrel, significantly raising the country's energy bill.<br /><br />The government has called for increases of about Re 0.5 per litre each month, a source at one of the oil retailers with direct knowledge of the development told Reuters on Thursday.<br /><br />Bulk buyers will have to pay market rates for diesel, which accounts for 40 per cent of fuel consumption in the country, the source, who requested anonymity, said. According to a government calculation, this step will affect almost a fifth of diesel sales and should boost by some $2.4 billion annually revenues at the companies, which suffer losses selling fuel below cost.</div><div> </div><div>Diesel is currently sold at a loss of over Rs 10.80 per litre.<br /><br />On January 17, oil firms hiked diesel price by 45 paise. After including local VAT, the increase in Delhi came to 50 paisa. The diesel now costs Rs 47.65 a litre in the capital.<br /><br /><strong><br />Read Also: <a href="http://www.businessworld.in/en/storypage/-/bw/govt-allows-oil-omcs-to-raise-diesel-prices/735117.16627/page/0">Govt Allows Oil OMCs To Raise Diesel Prices</a></strong><br /><strong>Read Also: <a href="http://=http://www.businessworld.in/tagpage?tag=307995">Diesel Prices<br /></a><br /></strong>Moily said the decision to raise diesel prices in small doses every month will stand "until further orders". He, however, did not say when the oil firms will effect the second price increase.<br /><strong><br /></strong>Deutsche Bank estimated an increase in the diesel price by 50 paise per month would raise oil company revenues by Rs 21,500 crore, or Rs 12,000 crore taking into account increased spending on cooking gas.<br /><br />It is not clear for how long the monthly increases will run.<br /><br />Petrol prices will be cut by 25 paise per litre from 1 February, the source said. These were freed up in June 2010 but have also largely remained under the government's control.<br /><br />After the government's earlier announcement, share prices for the main oil marketing companies rose sharply.<br /><br />The rupee hit a one-month high, while yields on Indian bonds dropped in a sign the market expects the new policy will result in lower subsidies in the medium-term.<br /><br />The decision for retail price hike was coupled with a move to charge bulk consumers like defence, railways and state transport undertakings market price which is almost Rs 10 a litre more than retail selling rate, to save an estimated Rs 12,907 crore in annual subsidy.<br /><br />Moily said he had heard of States like Gujarat and Tamil Nadu asking their public transport fleet to refuel at petrol pumps instead of buying diesel from oil firms directly as is the current practice. This is being done with a view to avoid paying the market price mandated for them.<br /><br />"We need to look into that (issue). I have also heard about it. We are ceased of that matter," he said, adding when rules are laid there are people who find ways to circumvent it.<br /><br />Instead of buses being asked to refuel at petrol pumps, the states should reduce high local sales tax or VAT on diesel to cut prices, Moily added.<br /><br /><strong>A Balancing Act Between Politics & Economics<br /></strong></div><div>"This is a brilliant balancing act between politics and economics. This is one step backwards and one step forward," said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy.<br /><br />"While the decision on the LPG cylinder will pacify their political constituency, the decision on diesel sends out a message to the (central bank) that the government is serious about tackling subsidies and controlling the fiscal deficit."<br /><br />The Reserve Bank of India (RBI) has long called on the government to reduce its fiscal deficit, which drives government borrowing and keeps upward pressure on interest rates. The central bank meets on January 29 to set monetary policy and has signaled that it is likely to cut interest rates.<br /><br />Ratings agencies had threatened to strip India of its investment-grade credit rating if the government did not take steps to curb the widening fiscal deficit. Finance Minister P. Chidambaram has vowed that the deficit will not exceed 5.3 percent of GDP this financial year.<br /><br /><br /> </div>
