Likely impact of fuel price rise

New Delhi: Many flights were cancelled, schools shut and businesses disrupted across India yesterday because of a strike over fuel price rises that tests the government's efforts to cut subsidies and trim a budget deficit.

India has moved to ease price controls on petrol and raised other fuel rates, and Prime Minister Manmohan Singh signalled his resolve to push bold reforms with intentions to free up diesel prices at a later date.

Here are some questions and answers about the implications of the fuel price rises.

What will be the political impact?

Opposition parties will likely try to block legislation in the next parliament session by seeking support from the ruling Congress party's coalition allies.

Congress could be hit in state elections, including West Bengal and Tamil Nadu, in early 2011. But the rises come months before the votes and voter backlash can be mitigated by using savings from fuel price deregulation to boost social spending.

There is also an escape clause. The government has already said it would intervene if crude prices rise sharply. What ‘sharply' means is unclear and it could be used politically to justify a new increase in subsidies.

What will be the impact on india's retail oil market?

State firms such as Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum, which control more than 95 per cent of about 40,000 refined fuel pumps in India, are likely to lose market share.

Reliance Industries, which operates the world's biggest refining complex at Jamnagar, is expected to revive all its pumps, which were shut down five years ago when the government started subsidising fuel sold by state firms. Essar Oil is also expanding its retail network.

How soon will private firms expand retail networks?

The government has only freed the price of petrol, which accounts for about 10 per cent of oil products sold. The government has said it will also free up diesel, used by trucks, buses and a growing number of cars, and which accounts for more than a third of the oil consumed. Private firms will speed up retail expansion once price controls on diesel are removed.

What is the extent of the price rise?

Domestic fuels are taxed differently by the states. In New Delhi, petrol prices were raised by 7.3 per cent, diesel by 5.2 per cent, kerosene by 32.5 per cent and LPG by 11.3 per cent.

How will petrol prices be set?

Companies will fix their own prices. This could see more competition in the retail sector and eventually push down prices.

How will it impact exports of oil products?

Exports may fall. As Reliance increases domestic sales, it may reduce exports from its 660,000 bpd plant to sell to the domestic market, which is usually more lucrative.

Will inflation stay at elevated levels?

Yes. That is very likely. The Finance Ministry's chief economic adviser, Kaushik Basu, said the price rises would impact headline inflation by 0.9 percentage points. Analysts have also estimated that the price increases may lead to a rise in headline inflation of more than 100 basis points with a lag of a few weeks. A senior government official said June headline inflation could even touch 11 per cent.

But forecasts from the Indian Meteorological Department suggest that rains this year are expected to be normal, which should bring down food prices and inflation. The central bank expects headline inflation to ease to 5.5 per cent by the end of this financial year.

To what extent will the fiscal deficit come down?

With windfall gains from the sale of telecom spectrum and a lower fuel subsidy bill the government expects the fiscal deficit this financial year to ease to about 4.5 per cent of gross domestic product from 6.7 per cent.