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Govt announces highest ever hike
June, 05th 2008

The government today announced the highest ever hike in retail price of petrol, diesel and cooking gas to bail out its bleeding oil marketing companies. This triggered the sharpest fall in the 30-share sensex in the last two months as the move stoked fears of inflation and slowdown in economic growth.

The price of petrol will be hiked by Rs 5 per litre from midnight tonight, while diesel price will be hiked by Rs 3 per litre. The LPG cylinder will also be Rs 50 dearer from tonight. The price of kerosene the only other subsidised petroleum product was left untouched.

Excise and customs duty on crude oil and oil products was also reduced, a move which will put more money in the hands of the financially-strapped oil marketing companies who were facing a projected black hole of Rs 245,000 crore this year,  over three times more than last year's bill, thanks to record high crude oil prices.

 "Due to the relentless increase in international oil prices it has now become necessary for the also shoulder a small part of the increased burden," Petroleum Minister Murli Deora told reporters after an early morning cabinet meeting which approved the hike of the fuels.

Petroleum Secretary MS Srinivasan said that the rise in prices of the fuels would add 0.5-0.6 percentage points to inflation, last reported at 8.1 per cent.

The hike in prices will result in a gain of Rs 21,123 crore for the cash-strapped oil marketing companies Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL).

The reduction in excise duty on petrol and diesel (by Re 1 per litre) and cut in customs duty -- on crude oil from 5 per cent to nil, on petrol and diesel from 7.5 per cent to 2.5 per cent and on all other petroleum products such as aviation fuel, from 10 per cent to 5 per cent -- will reduce the under-realisation burden by another Rs 22,600 crore.

Oil and oil products are major contributors to exchequer. Excise duty collections from oil and oil products accounted for almost half of the total excise collections of Rs 125,000 crore in 2007-08, and 17.5 per cent of the customs duty collection of Rs 104,000 crore in the year.
Srinivasan also said the upstream oil companies Oil and Natural Gas Corporation (ONGC), Oil India (OIL) and GAIL will bear around Rs 45,000 crore or about 18 per cent of the projected under-realisation, up from Rs 26,000 crore last year.

The marketing companies will also take a hit of Rs 20,000 crore during the year as a result of the cap on retail prices, against the Rs 16,000 crore burden they bore in 2007-08.

All of these measures together will shave off around Rs 107,000 crore from the projected Rs 245,000 crore under-realisation for the year. Revenue Secretary PV Bhide said that oil bonds worth around Rs 94,600 crore will be disbursed to the oil marketing companies during the current financial year. This however still leaves Rs 43,400 crore of the projected under-realisation unaccounted for.

Srinivasan said that the oil ministry would work out the actual under-recoveries on a quarterly basis and ask the finance ministry for oil bonds, though he declined the detail the quantum of oil bonds likely to be issued during the year. "It all depends on oil prices. We will give as much as is required," he said.

Following an immediate spurt after the announcement, the stocks of the oil marketing companies declined heavily in a weak market . IOC's share price on the Bombay Stock Exchange fell 3.61 per cent after rising as much as 5 per cent immediately after the announcement. BPCL's share price fell 7.84 per cent while HPCL's share price fell 2.90 per cent.

Shares of user industries like automobiles and two wheeler makers also saw a sharp fall on the BSE today.

While oil companies and industry welcomed the hike and the duty cuts, the left parties have announced a week long countrywide agitation against the price hikes.

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