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Fuel corrections may add upto 1.2% to WPI inflation by March, 2014

However, Centre's subsidy burden to reduce in the next fiscal, will allow it to roll out proposed Food Security Act without widening deficit

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Dilasha Seth New Delhi
Last Updated : Jan 29 2013 | 2:34 PM IST

The government move to correct oil and gas prices will raise the wholesale-price inflation by 0.5-1.2 percentage points and the impact will be staggered over next financial year, experts say.

They said, net impact of the move-- hiking diesel prices for retailers, charging market price for the bulk purchase, raising prices of unsubsidized LPG cylinders while increasing the cap on subsidized cylinders--will be that the Centre's subsidy burden will come down in the next fiscal that will allow it to roll out proposed Food Security Act without widening fiscal deficit.

However it is to be noted that a Rs 5 a litre hike in prices of diesel in September and capping of subsidised LPG cylinder to six a family in a year resulted in increasing the wholesale price inflation to just an 8.07% that month versus 8.01% in August. Eventually, it declined to 7.18% in December.

With up to 45 paise hike per litre a month in diesel prices is expected to make the fuel dearer  by Rs 1.35 till March, which will result in a 7-8 basis points increase in inflation every month initially and 50 basis points increase all together by March 2014, said Soumya Kanti Ghosh, chief economist with the Federation of Indian Chambers of Commerce and Industry (FICCI). 

“Looking at the September experience, we can say that there will be up to 24 basis points increase in inflation till March 2013, and see inflation stabilize from thereon”, he added.

Diesel has a 4.67% weight in overall inflation. The rate of price rise in diesel went up to 8.94% in September, compared to 0.48% in August and to 14.6% in October. It remained stable at 14.6% in November and December. 

“Diesel price increase will show more in the retail inflation than wholesale price inflation”, said Madan Sabnavis, chief economist, CARE Ratings.

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Where the consumer-price inflation touched all-time high of 10.56% in December, the wholesale-price inflation was at a 3-year low. This was so because food inflation rose both in consumer and wholesale price indices, but food articles have a close to 50% weight in the consumer price index (CPI), while these items have just 24.4% weight in the wholesale price index (WPI).

A report by Bank of America Merrill Lynch said diesel price hikes will add 120 basis points to the WPI inflation in 2013-14. “Inflation should persist around 7% in the March quarter. It will then likely go back up to 7.5-8% in the second half of 2013”, it said.

Diesel to bulk users, including the railways, will be sold at market rates, increasing prices by 9.25 rupees. According to experts about 15-17% of sales of oil marketing companies (OMCs) are to the bulk buyers, which will lead to immediate saving for the government in terms of cut in subsidies.

Ghosh said with the increase in diesel prices, government will save Rs 35,000 crore in 2013-14 and in case there is a complete decontrol of diesel, the government’s savings will go up to Rs 70,000 crore.

However, others were skeptical. "Even as the ball passes into the OMCs’ court, we are skeptical about the quantum and frequency of price increases," noted a report by Kotak Institutional Equities. “Without periodic increases, the Government stands to gain only Rs 6,500 crore on the subsidy bill."

The government had provided only Rs 43,580 crore in the budget for this year; most of it was used in offsetting last year’s losses. So, the OMCs had to be supplemented with another Rs 28,500 crore subsidy.

The petroleum ministry is now seeking an additional subsidy of Rs 1 lakh crore from the government, even after Rs 30,000-crore subsidy-sharing by state-owned Oil and Natural Gas Corporation, GAIL India and Oil India.
Higher diesel prices will help reduce annual revenue losses on fuel sales at the three state-run refiners by Rs 15,000 crore, Indian Oil said yesterday.

In the budget for 2012-13, then finance minister Pranab Mukherjee had announced reining in subsidies to 1.9% of the GDP. However, his successor P Chidambaram raised the estimates to 2.4% of the GDP, which would increase the Centre's fiscal deficit to 5.3% of GDP in the current financial year against 5.1 pegged in the Budget.

According to experts, the government can look at subsidies at 2% of the GDP in 2013-14. Ghosh said,"In case of a complete diesel price decontrol, oil subsidies will decline from 1% of the GDP estimated this year to 0.3% of the GDP next fiscal, which will help government save Rs 70,000 crore, which can be released for the Food Security Bill scheme, without hurting the fiscal deficit."

According to economists, containing fiscal deficit to 5.3% of the GDP will be difficult this fiscal, considering no major disinvestment has occurred even in January. They are looking at fiscal deficit somewhere around 5.5-5.8% of the GDP in the current financial year. For the next financial year, the finance ministry has pegged the fiscal deficit at 4.8% of GDP.

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First Published: Jan 18 2013 | 7:38 PM IST

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