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India Equity Research Reports, IPO and Stock News
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INDIA POLCY – Government
bites the bullet
The Indian government finally bit the bullet and
announced an overdue hike in the prices of diesel,
kerosene (poor man’s fuel) and LPG (cooking gas).
The hikes are meant to ease the burden on the state
oil marketing companies for selling these fuels at
subsidised prices. The price of diesel has been
increased by INR3/litre (+9%), while kerosene and
LPG prices have been raised by INR2/litre (+15%)
and INR50/cylinder (+14%). The increases follow
an 8% hike in petrol prices in mid-May.
The government has complemented the price hike
with lower import and excise duties, which will
collectively cost the exchequer INR368bn (0.4% of
GDP) for the remaining three quarters of FY12.
The price hikes and the duty reductions will lower
the revenue foregone (under-recoveries) of the oil
companies by INR500bn, but they will still end the
fiscal at a sizeable INR1.22trn.
The decision to hike fuel prices is a bold political
move given that WPI inflation is already running at
an uncomfortable level of 9.1% YoY. The increase
in fuel prices will push it up further and also
prompt protests and calls for a rollback. There are
three main implications of the latest move: (1) it
shows strong policy response after months of
inaction; (2) the total (direct and indirect) impact
of the price hikes on inflation will be around 1ppt
to the headline WPI; (3) the federal government’s
fiscal deficit in FY12 is likely to be higher at 5.2%
of GDP, above our earlier expectation of 5% and
well above the official forecast of 4.6%.
The diesel price hike is the most relevant for the
inflation outlook, as it has a high weight in the
WPI basket. It is also the ultimate intermediate
input, and the hike will affect other prices,
especially for transportation, and push up core
inflation. Headline WPI inflation is likely to be in
the 9-10.5% YoY range for the next few months
before easing to 7.5% by March 2012 (RBI: 6.0%).
The inflation trajectory will be affected by the
current monsoon season and by further adjustments
in fuel prices, if any.
We maintain our expectation of a 25bp hike in the
repo rate by the RBI on 26 July and of 8% on the
repo rate (currently 7.5%) by September. The June
WPI won’t capture the full impact of the hike in
fuel prices. The recent decline in crude is positive
but the local price adjustment will still push
inflation up. Note that inflation in India has been
“suppressed” due to the incomplete pass through of
international commodity prices of several items.
The lack of proper fiscal adjustment has
undermined the effectiveness of the RBI’s
aggressive monetary tightening. Thus, the higher
pass through to consumers will aid in checking the
growth in aggregate demand by slowing down
consumer spending. However, the hit to revenues
is expected to push up the FY12 fiscal deficit to
5.2% of GDP, higher than our earlier expectation
of 5%, and well above the official forecast of 4.6%.
The hit to the deficit is lower than the decline in
revenues as the government will also benefit from
higher income tax and dividends. Rating agencies
and the local bond market are unlikely to be
pleased with the higher deficit.
It is likely that there will be some expenditure that
has been budgeted but does not go through,
thereby offering some saving. The best indication
of that will be the supplementary demand for
grants later in the year. It is highly likely that the
current FII limit of USD10bn in local government
bonds will be increased by USD5-10bn.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INDIA POLCY – Government
bites the bullet
The Indian government finally bit the bullet and
announced an overdue hike in the prices of diesel,
kerosene (poor man’s fuel) and LPG (cooking gas).
The hikes are meant to ease the burden on the state
oil marketing companies for selling these fuels at
subsidised prices. The price of diesel has been
increased by INR3/litre (+9%), while kerosene and
LPG prices have been raised by INR2/litre (+15%)
and INR50/cylinder (+14%). The increases follow
an 8% hike in petrol prices in mid-May.
The government has complemented the price hike
with lower import and excise duties, which will
collectively cost the exchequer INR368bn (0.4% of
GDP) for the remaining three quarters of FY12.
The price hikes and the duty reductions will lower
the revenue foregone (under-recoveries) of the oil
companies by INR500bn, but they will still end the
fiscal at a sizeable INR1.22trn.
The decision to hike fuel prices is a bold political
move given that WPI inflation is already running at
an uncomfortable level of 9.1% YoY. The increase
in fuel prices will push it up further and also
prompt protests and calls for a rollback. There are
three main implications of the latest move: (1) it
shows strong policy response after months of
inaction; (2) the total (direct and indirect) impact
of the price hikes on inflation will be around 1ppt
to the headline WPI; (3) the federal government’s
fiscal deficit in FY12 is likely to be higher at 5.2%
of GDP, above our earlier expectation of 5% and
well above the official forecast of 4.6%.
The diesel price hike is the most relevant for the
inflation outlook, as it has a high weight in the
WPI basket. It is also the ultimate intermediate
input, and the hike will affect other prices,
especially for transportation, and push up core
inflation. Headline WPI inflation is likely to be in
the 9-10.5% YoY range for the next few months
before easing to 7.5% by March 2012 (RBI: 6.0%).
The inflation trajectory will be affected by the
current monsoon season and by further adjustments
in fuel prices, if any.
We maintain our expectation of a 25bp hike in the
repo rate by the RBI on 26 July and of 8% on the
repo rate (currently 7.5%) by September. The June
WPI won’t capture the full impact of the hike in
fuel prices. The recent decline in crude is positive
but the local price adjustment will still push
inflation up. Note that inflation in India has been
“suppressed” due to the incomplete pass through of
international commodity prices of several items.
The lack of proper fiscal adjustment has
undermined the effectiveness of the RBI’s
aggressive monetary tightening. Thus, the higher
pass through to consumers will aid in checking the
growth in aggregate demand by slowing down
consumer spending. However, the hit to revenues
is expected to push up the FY12 fiscal deficit to
5.2% of GDP, higher than our earlier expectation
of 5%, and well above the official forecast of 4.6%.
The hit to the deficit is lower than the decline in
revenues as the government will also benefit from
higher income tax and dividends. Rating agencies
and the local bond market are unlikely to be
pleased with the higher deficit.
It is likely that there will be some expenditure that
has been budgeted but does not go through,
thereby offering some saving. The best indication
of that will be the supplementary demand for
grants later in the year. It is highly likely that the
current FII limit of USD10bn in local government
bonds will be increased by USD5-10bn.
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