Commentary: Massive Hike in Price of Petroleum Products in India

Petroleum price hike may be strategy to save face in Indian Budget

Everyone got a nasty surprise when the price of gasoline, cooking gas and diesel went up by 25 to 30% - with little advance warning. Consumers and trade unions took to the streets in protest, while the Bombay Stock Exchange bottomed out, losing over 90 points.

Trouble is brewing for India's governing alliance as a recent hike in petroleum prices has opposition parties and members of the ruling coalition up in arms. The Budget Session of parliament, which opened on 10 July, is expected to test Prime Minister H D Deve Gowda's leadership abilities as he tries to keep his unruly band of communists, socialists and free-traders in line.

The price of gasoline went up 25%, while diesel, liquefied petroleum gas (LPG), used for cooking, paraffin wax and fuel oil were raised by 30%. The price of kerosene oil, a cooking fuel for many of India's poor, remains unchanged.

Despite five years of economic reform the oil industry is still in the firm grip of a government monopoly.

Responding to intense criticism from some of the coalition's main players, the government dropped the diesel hike to 15%. Mr. Gowda's quick retreat on the price of diesel, observers say, is a sign of weakness that bodes ill for the stablity of the coalition government.

Rumbling from inside the coalition, especially from the Communist Party of India (CPI), show that all might not be well for the not-so United Front. The CPI accused the government of backtracking on it's pro-poor agenda.

Meanwhile, the Congress Party, trounced in 1996 General Elections, but key to the survival of the United Front Coalition, has threatened to withdraw its support if the government pushes such unpopular measures.

According to Finance Minister P Chidambaram, the increase was inevitable since heavy subsidies on petroleum products have been draining the treasury. The increase is the first since 1994 and was needed to balance a steady rise in international oil prices and the depreciation of the rupee.

India's annual oil import bill is more than $6.2 billion a year and demand is growing by 10% every year.

The price increase is an attempt to raise revenue and reduce the deficit. The United Front's economic manifesto, The Common Minimum Programme (CMP), released shortly after it came to power on June 1, promises bring down the deficit from 7% to 4% of the GDP.

Despite promises by the government to put a human face on economic reform and protect the interests of the poor, the sudden price hike is likely to hit the poor the hardest. An increase in petrol prices means that all forms of passenger and freight transport will probably cost more, and an increase in freight charges means all prices will go up. This will push up India's inflation rate, which has remained below 10% for the past two years.

Jennifer Morrow is a Canadian radio journalist based in New Delhi. She edits a publication on social and current affairs in South Asia, and is a freelance correspondent for the Voice of America.
She is a member of the Indian Economy Overview editorial panel.

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