Govt bites the bullet on oil

Freeze on petrol, diesel, LPG prices lifted.

The government decided to permit oil marketing companies to raise the prices of petrol, diesel and cooking gas from midnight tonight despite stiff opposition from the Left.

The companies have been given the flexibility to link the price of petrol to import parity. For diesel, the Cabinet Committee on Economic Affairs (CCEA) allowed oil companies to hike prices by half the required increase to reach import parity level, Petroleum Minister Mani Shankar Aiyar told reporters after the meeting.

Oil companies had estimated under-recoveries of around Rs 2.20 on a litre on petrol and Rs 4.15 on a litre on diesel.

Following the CCEA approval, petrol prices in the four metros will be dearer by Rs 2.19-2.37 a litre and diesel by Rs 2.12-2.53. Chennai and Mumbai will see the steepest increase of Rs 2.37 a litre in the price of petrol. Mumbai will also have to pay Rs 2.53 a litre more for diesel, the highest among the four metros.

The government also decided to allow oil marketing companies to raise cooking gas prices by Rs 20 a cylinder from midnight tonight. From December, the price of LPG cylinders will increase by Rs 5 every month. Kerosene prices, however, remain unchanged.

The difference between the import parity price of LPG and its retail price will stand at Rs 138 despite the Rs 20 hike. If the under-recoveries do not increase in the coming days, a Rs 5 hike every month will result in a gradual phase-out of the subsidy by April 1, 2007, the deadline for reducing the subsidy on LPG and kerosene sold through the public distribution system to nil.

The move is going to significantly bolster the revenues of oil marketing companies, which estimated under-recoveries of Rs 10,000 crore during the second half of the current financial year.

The under-recoveries, prior to the CCEA decision, were estimated at Rs 20,000 crore in 2004-05. Public sector oil companies lost Rs 3,646 crore in the April-October period on the sale of petrol and diesel and over Rs 7,200 crore on LPG and kerosene.

It would also save the government from incurring a huge loss in terms of revenue. The petroleum ministry's proposal to reduce Customs and excise duties would have resulted in a Rs 4,000 crore loss to the exchequer during the remainder of the fiscal year.

Government sources said the decision was taken after key allies like Railway Minister Lalu Prasad were convinced about the need to hike prices.

Prasad was mollified through the offer of a special package for Bihar. The state's quota of kerosene to be sold through the public distribution system is expected to be increased and the LPG distributorship network will also be strengthened.