‘Petrol price hike doesn’t hit entire economy’
New Delhi   19-Sep-2011

Subsidizing the fuel will aggravate the fiscal deficit scenario and give rise to inflationary factors that will affect all and not just the actual users, Ranbir Singh Butola, chairman of fuel retail market leader IndianOil, tells Sanjay Dutta.

Was it the right time to raise petrol price when inflation is high and RBI was expected to raise interest rates?

Public sector oil marketing companies increase fuel prices only as a last resort. IndianOil alone had taken a Rs 1,129 crore loss on petrol in Q1. The government will not compensate this since it is decontrolled. Petrol price was last raised by Rs 4.17, excluding sales tax, on May 15. At the pump level, this meant an increase of Rs 5 a litre. Even after that we were losing Rs 4.58 a litre. At pump level then, the price was still lower by Rs 5.50.Subsequently, the government reduced customs and excise duties on June 25. This reduced the losses on petrol to a level where we expected to absorb a loss of Rs 8 crore in Q2. In the fortnight before Thursday’s price increase, we were taking a 41 paise loss on petrol but we did not raise the price, hoping crude would decline. However, global prices of both crude and gasoline rose to push our loss on petrol up to Rs 2.61 per litre. But rest assured that whenever the international prices slide, we will promptly pass on the benefit to consumers.

But won’t it increase inflation further?

This can best be answered by experts. However, we had looked at the issue in some detail in the past. Experts had told us that the impact of a Rs 3 per litre increase in petrol price is negligible at 0.07%. A similar increase in diesel price may have an impact of about 0.42% on inflation. But it will be a fallacy to look at only these numbers, given the fact that we, as a country, import more than 75% of the crude we consume. If we do not pass the impact of high global prices to consumers, worrying that it will burden them, we will not be conveying the correct picture. The economy has to ultimately bear the burden losses on fuels. Since a large part of such losses is compensated by the government, consumers will any way be affected indirectly by high fiscal deficit and resultant inflationary impacts.

Why don’t you increase the price in small doses, say when your losses are at 30-40 paise, instead of waiting till the situation requires a substantial jump?

In a sense, perhaps, there may be a rationale to revise prices in small numbers against our current practice of bearing the small losses and passing on only big increases to consumers when it becomes totally unbearable. The big increases do look large, but in effect, it means the same. At this moment, however, we are eagerly looking for an opportunity to reduce the prices and wish that the global tightness improves paving way for international prices to slide.

How does your pump price stack up against rates for crude and petrol in the global market?

The Rs 63.70 per litre price before the increase corresponded to $116.68/ barrel of crude; whereas gasoline (petrol) cost $118/barrel in the international market. If you back-work this at crude’s level, the pre-hike price was really set at $103/barrel against the actual price of $106 prevalent in the second fortnight of August. We expected prices to remain at this level or fall further. But crude moved up in the first fortnight of September, averaging $110.69. Similarly, gasoline rose to an average of almost $124.