Montek favours hike in oil prices

The Planning Commission on Tuesday made a case for increasing prices of petrol and diesel arguing that it was not a good idea to check inflation by keeping prices of petroleum products low.

"If the oil prices remain high on a sustained basis it will have to be passed on to the consumers...I don't believe keeping oil prices low is a good way of controlling inflation", deputy chairman of the Planning Commission Montek Singh Ahluwalia said on the sidelines of the World Economic Forum (WEF) meeting in New Delhi.

The government has refrained from increasing domestic prices of petroleum goods because of political considerations especially forthcoming assembly elections in Gujarat, though the crude oil prices in the international market reached near $100 per barrel. The prices, however, later softened to $88 per barrel.

Even the Prime Minister Manmohan at a meeting of the Planning Commission last month expressed concern over rising subsidy bill towards food, fertiliser and petroleum products and said it would go up to Rs 1 lakh crore during the current financial year.

Increasing prices of petrol and diesel also assumes significance in view of the huge losses being incurred by the state-owned oil marketing companies like Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum.

Taking note of the mounting losses, international credit rating agency Moody's on Monday downgraded the rating outlook of the blue chip oil major IOC from stable to negative.

Moody's pointed out that change in IOC's rating outlook to negative reflects the persisting challenges arising from the oil subsidy scheme in India, and the consequent financial impact on the oil company. The burden of under-recoveries is being exacerbated by the high oil prices which are straining IOC's liquidity profile, it added.

The Planning Commission has been suggesting that government should try to safeguard the interest of poor by providing targeted subsidies and excluding those who can afford to pay the actual cost.

Even on an earlier occasion Ahuwalia had emphasised that increased energy cost must be shared by the consumers as the burden is currently being largely borne by public sector oil companies.

He said present policy of insulating consumers from global price rise was not sustainable as it would impair the ability of the government to fund social sector programmes.

According to Plan Panel's estimates 25 per cent increase in oil prices over $80 a barrel can increase the country's import bill by 5 per cent, besides raising the current account deficit.