Sep 14, 2012, 10.54 AM IST

Diesel price hiked by Rs 5/litre; petrol, kerosene spared

The government raised the price of heavily subsidised diesel on Thursday, in a politically risky move to rein in the fiscal deficit and fight the threat of being the first in the BRICS group of emerging economies to be downgraded to junk.

Source: Moneycontrol.com

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The government today decided to hike diesel prices by Rs 5 per litre effective midnight tonight, but left petrol, kerosene and LPG rates untouched. The politically "bold" move is aimed at reining in the country's heavy fiscal deficit and fend off the threat of being the first in the BRICS group of emerging economies to be downgraded to junk.

A cabinet committee, headed by the Prime Minister, agreed to raise diesel prices by 12%, or Rs 5 per litre, excluding VAT (value-added tax), and restricted sales of subsidised LPG cylinders to six per consumer annually, the government said in a statement. It left petrol and kerosene prices unchanged. The excise duty on petrol has been cut by Rs 5.50 per litre.

Diesel in Delhi costs Rs 41.32 a litre and after this hike, it will cost Rs 46.95, after considering 12.5% VAT on the hike.

Petrol needed a hike of Rs 6 per litre but the government offset that by reducing excise duty by Rs 5.50 per litre from existing rate of Rs 14.78 per litre.

The move is expected to reduce oil-marketing companies’ under recoveries by Rs 20,300 crore.

The tough decisions, which came under immediate attack from allies like Trinamool Congress and Samajwadi Party and opposition alike, were taken at a meeting of the Cabinet Committee on Political Affairs (CCPA) chaired by Prime Minister Manmohan Singh. It will come into effect from midnight.

The government, which has been facing criticism of policy paralysis, had last hiked the price of diesel by Rs 3 a litre in June last year.

BACKGROUND

-- New Delhi subsidises the prices of diesel, cooking gas and kerosene to dampen inflation and protect the poor, a popular policy that has nevertheless put a severe strain on public finances.

-- The rising bill from the fuel subsidy and the resulting strain on public finances have put India's investment grade credit rating in peril.

-- India's rate of inflation probably picked up in August from July's near three-year low as poor summer rains drove up food prices, a Reuters poll showed.

-- The Reserve Bank of India is expected to keep its key interest rate steady when it reviews its monetary policy on Monday, according to a Reuters poll earlier this month. It has called on the government to free up supply constraints that have pushed up food prices, and launch fiscal reforms.

With inputs from agencies.