Mumbai // India is grappling with how to deal with the impact an expected hike in heavily subsidised fuel prices will have on the country's economy as it struggles with high inflation and slowing growth.
India has been dithering on raising fuel prices but the country's oil minister this week said a rise was imminent.
Fuel, including diesel and kerosene, costs much less than it should in India compared with international rates because of government subsidies. These subsidies are weighing on the government's finances at a time when the economy slowing in growth and the threat of a downgrade to its sovereign credit rating to junk status.
But at the same time an increase in fuel prices will only add to the country's inflation woes and present a further burden to companies and consumers, economists say.
"It's a difficult task," says Kamal Sen, the president of Cogitaas, an economics and finance consultancy. "There's a downside on both sides. One issue is the fiscal deficit."
But, in alleviating the strain on the country's fiscal deficit, consumers will have to absorb the costs.
"Every company is shuddering with cost inflation right now," says Mr Sen. "Especially, driving up diesel prices is going to drive up cost inflation. It's a bullet that has to be bitten. "It is going to put a burden on the companies and individuals and consumers. You will have the cascading effects of hiking cab fares and other things."
Public-sector oil marketing companies are incurring losses of 14 rupees per litre on diesel and 29 rupees on kerosene. This led to a loss of more than 405 billion rupees (Dh26.96bn) reported by the three public-sector oil marketing companies in India, IOC, BPCL and HPCL, in the first quarter of this financial year, according to Crisil, an Indian ratings and research firm.
In the last financial year, oil subsidies made up 32 per cent of the government's total subsidies, reaching 835bn rupees.
"However painful and difficult an increase in the prices of oil products may be, an increase is unavoidable," the oil minister S Jaipul Reddy, said Tuesday.
"To what extent can the consumer take it is another matter. I would like to tell the people the increase in price is unavoidable. We will have to perform our unpleasant duty."
Still, there has been no clarity on when the hike will be announced, the amount prices will increase by,and what fuels the rises will be applied to. At the moment, diesel is a major burden, analysts say.
"There's a scenario where your international prices are not really being fully reflected in the domestic prices at which diesel is being sold in the market," says Rahul Prithiani, a director at Crisil.
"As a result, what is happening is a large chunk of the demand is coming because of the differential in prices. So sales of diesel vehicles are going up."
Diesel make up about 55 per cent of oil consumption in India, according to Crisil.
The impact of an increase in the price of diesel, however, would ripple through the country and be felt by everyone.
"Diesel is an important component in the overall inflation basket for the country," says Mr Prithiani.
"For all internal transport, diesel is used - be it [for transport of] your vegetables [and] fruits to cars. This leads to a scenario where an increase in the price of diesel, the end price of some of these items will increase. That is what worries the government."
Mr Sen notes an increase in diesel prices will also have a significant impact on altering perceptions of the government.
"This government has been seen to be weak on reforms or weak on unpopular decisions," he says.
"So I think what people are looking for is if there is a hike in fuel prices, particularly diesel prices, that's a signal to foreign investors, to industry, that this government is serious about economic reforms."
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