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● Following on from the mid-May petrol price rise, the Indian
government outlined another round of diesel, LPG and kerosene
price hikes late on Friday. At the same time, however, it also
announced reductions in several duties.
● Clearly, the intention was to alleviate some of the pain faced by
the state-owned oil companies while minimising the damage to
the private sector.
● We estimate that the fuel price hikes will add 0.6-0.7 percentage
points to the wholesale price index, but little or nothing to the
headline rate of inflation. It is important to bear in mind that a very
similar increase was delivered at virtually the same time last year
which will drop out of the annual comparison. The move was in
line with our expectations and we are not changing our aboveconsensus WPI forecast or our expectation of two further 25 bp
RBI rate hikes.
● The duty reductions, which are estimated to cost the general
government 0.5% of GDP, will put further upward pressure on the
fiscal deficit.
As we have been expecting, the Indian government announced a
range of regulated fuel price hikes late on Friday night. Diesel will rise
by 3 rupees a litre (8%), kerosene by 2 rupees and LPG by 50 rupees
a cylinder (both about 16%). The move is designed to cut the
government’s oil subsidy bill, which is set to significantly exceed the
Rs236 bn official estimate presented in the 28 February budget, as
well as help relieve the losses being incurred by the state-run oil
companies. The move really shouldn’t have come as much as a
surprise, but has nevertheless sparked an inevitable round of wailing
and gnashing of teeth.
Despite warnings to the contrary, it seems to us that the effects on
Wholesale Price Inflation (WPI) are likely to be extremely limited. We
estimate that the latest fuel price hikes will directly add 0.6-0.7
percentage points to the wholesale price index, most of which will be
seen in July. But the point is that there was a very similar increase in
the same period last year, meaning that the year-on-year rate should
remain largely unaffected. On 26 June 2010, the government
announced a two-rupee rise in diesel prices, a three-rupee increase in
kerosene and a Rs35 hike in LPG.
In an attempt to minimise the impact of the fuel price rises on
businesses and consumers, the government also outlined a number of
tax reductions as follows:
● The removal of the remaining 5% customs duty on crude oil
imports.
● Import duty on gasoline and diesel lowered by 5 percentage points
to 2.5%.
● Excise duty on diesel lowered to Rs2/litre from Rs4.6.
As this stage, it is not clear to what extent the various state
governments, whose decision it is whether to implement the
reductions, will do so. The central government is certainly
encouraging them to pass on the cuts, but most state governments
have indicated they will review their finances before making a final
decision. The estimated cost of these measures is put at Rs490 bn,
equivalent to a sizeable 0.5% of GDP, although this is likely to
assume full pass-through.
Not surprisingly, the transport operators have reacted angrily to the
fuel price rises, coming a little more than a month after the five-rupee
(8.5%) increase in gasoline prices. Their initial reaction has been to
talk about 8-9% increases in freight rates, although the authorities
suggested that anything more than a 4% rise would be unjustified.
Strikes have been threatened.
All in all, the government’s various actions are clearly designed to
alleviate the pain on the oil companies, that are currently suffering
huge losses, while hoping to minimise the pain on the private sector
and the impact on inflation. Even so, barring a further sharp fall in
crude oil prices, our India oil analyst has estimated that the oil
companies under-recoveries will still amount to Rs1.1-1.2 tn – a
record high. Also, the reduction in the oil companies losses is thought
likely to be less than the revenue losses incurred by the government.
In other words, there will be a net fiscal hit.
At this stage, we are not making any change either to our aboveconsensus WPI forecast, which we expect to average 8% in 2011/12
(falling to 6% by March 2012), or our central government fiscal deficit
projection of 5.4% of GDP. The risks to both are on the upside,
however, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Following on from the mid-May petrol price rise, the Indian
government outlined another round of diesel, LPG and kerosene
price hikes late on Friday. At the same time, however, it also
announced reductions in several duties.
● Clearly, the intention was to alleviate some of the pain faced by
the state-owned oil companies while minimising the damage to
the private sector.
● We estimate that the fuel price hikes will add 0.6-0.7 percentage
points to the wholesale price index, but little or nothing to the
headline rate of inflation. It is important to bear in mind that a very
similar increase was delivered at virtually the same time last year
which will drop out of the annual comparison. The move was in
line with our expectations and we are not changing our aboveconsensus WPI forecast or our expectation of two further 25 bp
RBI rate hikes.
● The duty reductions, which are estimated to cost the general
government 0.5% of GDP, will put further upward pressure on the
fiscal deficit.
As we have been expecting, the Indian government announced a
range of regulated fuel price hikes late on Friday night. Diesel will rise
by 3 rupees a litre (8%), kerosene by 2 rupees and LPG by 50 rupees
a cylinder (both about 16%). The move is designed to cut the
government’s oil subsidy bill, which is set to significantly exceed the
Rs236 bn official estimate presented in the 28 February budget, as
well as help relieve the losses being incurred by the state-run oil
companies. The move really shouldn’t have come as much as a
surprise, but has nevertheless sparked an inevitable round of wailing
and gnashing of teeth.
Despite warnings to the contrary, it seems to us that the effects on
Wholesale Price Inflation (WPI) are likely to be extremely limited. We
estimate that the latest fuel price hikes will directly add 0.6-0.7
percentage points to the wholesale price index, most of which will be
seen in July. But the point is that there was a very similar increase in
the same period last year, meaning that the year-on-year rate should
remain largely unaffected. On 26 June 2010, the government
announced a two-rupee rise in diesel prices, a three-rupee increase in
kerosene and a Rs35 hike in LPG.
In an attempt to minimise the impact of the fuel price rises on
businesses and consumers, the government also outlined a number of
tax reductions as follows:
● The removal of the remaining 5% customs duty on crude oil
imports.
● Import duty on gasoline and diesel lowered by 5 percentage points
to 2.5%.
● Excise duty on diesel lowered to Rs2/litre from Rs4.6.
As this stage, it is not clear to what extent the various state
governments, whose decision it is whether to implement the
reductions, will do so. The central government is certainly
encouraging them to pass on the cuts, but most state governments
have indicated they will review their finances before making a final
decision. The estimated cost of these measures is put at Rs490 bn,
equivalent to a sizeable 0.5% of GDP, although this is likely to
assume full pass-through.
Not surprisingly, the transport operators have reacted angrily to the
fuel price rises, coming a little more than a month after the five-rupee
(8.5%) increase in gasoline prices. Their initial reaction has been to
talk about 8-9% increases in freight rates, although the authorities
suggested that anything more than a 4% rise would be unjustified.
Strikes have been threatened.
All in all, the government’s various actions are clearly designed to
alleviate the pain on the oil companies, that are currently suffering
huge losses, while hoping to minimise the pain on the private sector
and the impact on inflation. Even so, barring a further sharp fall in
crude oil prices, our India oil analyst has estimated that the oil
companies under-recoveries will still amount to Rs1.1-1.2 tn – a
record high. Also, the reduction in the oil companies losses is thought
likely to be less than the revenue losses incurred by the government.
In other words, there will be a net fiscal hit.
At this stage, we are not making any change either to our aboveconsensus WPI forecast, which we expect to average 8% in 2011/12
(falling to 6% by March 2012), or our central government fiscal deficit
projection of 5.4% of GDP. The risks to both are on the upside,
however, in our view.
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