India Partially Frees Diesel Prices to Curb Budget Deficit

India allowed state oil companies to raise diesel prices, stepping up efforts to curb fuel subsidies and tackle the widest budget gap in the largest emerging markets. Oil company shares surged and government bond yields fell.

The Cabinet allowed refiners to “increase prices in small amounts over a period of time,” Oil Secretary G.C. Chaturvedi, the senior-most bureaucrat in the Ministry of Petroleum and Natural Gas, told reporters in New Delhi yesterday. Diesel tariffs haven’t been completely deregulated, he also said.

“It’s positive for the fiscal deficit,” said Prasanna Ananthasubramanian, an economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “It will bring more credibility to the deficit target, even if they increase on a small but periodic basis.”

The decision adds to an economic-policy overhaul since mid-September that aims to stem a slowdown in economic growth, avert a credit-rating downgrade and spur investment. Finance Minister Palaniappan Chidambaram, who presents the budget next month, has pledged to contain the fiscal deficit at 5.3 percent of gross domestic product in the year through March 2013.

Indian Oil Corp. climbed 6.4 percent to 315.90 rupees at the close in Mumbai, its highest level since October 2011. Bharat Petroleum Corp. gained 3.7 percent to 396.15 rupees. Hindustan Petroleum Corp. rose 5.4 percent to 343.90 rupees. The benchmark BSE India Sensitive Index advanced 0.7 percent.

The yield on the 8.15 percent bonds due June 2022 fell four basis points, or 0.04 percentage point, to 7.84 percent in Mumbai, according to the central bank’s trading system. The rate touched 7.80 percent on Jan. 14, the lowest level for a benchmark 10-year security since July 2010. India’s rupee climbed 0.6 percent to 54.39 per dollar.

Inflation Risk

Indian Oil raised diesel prices by 0.50 rupees a liter in New Delhi effective today, according to the company’s website. The refiner also said it increased the price of domestic non-subsidized cooking gas cylinders by 46.50 rupees a bottle.

The move to allow higher tariffs “will be inflationary, which can’t be avoided,” said Ananthasubramanian, adding “suppressed inflation” is being brought to the surface.

Inflation, as measured by the wholesale-price index, eased to a three-year low of 7.18 percent in December while remaining the fastest in the so-called BRIC group, which also includes Brazil, Russia and China. India has the widest BRIC budget gap.

The refiners sell diesel, cooking gas and kerosene at fixed prices. They are partly compensated by cash payments from the government and discounts on crude oil by state explorers. Gasoline is deregulated.

Subsidy Bill

India plans to trim its subsidy bill for food, fuel and fertilizer to 1.9 trillion rupees ($35 billion), or 2 percent of gross domestic product, this financial year. The state refiners lost 738.2 billion rupees from selling diesel below cost in the nine months ended Dec. 31.

“The quantum of increase is very important because a very small increase in diesel really will have limited relevance,” said Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd. “One rupee a month will be a good frequency to look at in the beginning.”

The budget deficit was 5.8 percent of GDP in 2011-2012. The Finance Ministry projects Asia’s third-largest economy will expand as little as 5.7 percent in the 12 months to March 31, which would be the weakest pace in a decade.

Trade and fiscal shortfalls led Standard & Poor’s and Fitch Ratings to warn last year that they may strip India of its investment-grade credit rating, which could hurt the country’s ability to lure funds.

Refiners are losing 9.6 rupees on every liter of diesel they sell, according to Oil Ministry data. Losses on kerosene amount to 30.64 rupees a liter and on cooking gas to 490.50 rupees per 14.2 kilogram (31 pound) bottle.

The Cabinet yesterday raised the number of subsidized cooking-gas cylinders allowed per household to nine from six annually, Chaturvedi said.

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