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5 reasons why a fuel price hike is inevitable

By Sunil

5 reasons why a fuel price hike is inevitable
The Cabinet Committee on Political Affairs postponed its meeting to discuss a fuel price hike on Tuesday. However, a fuel price hike is inevitable and here are five reasons for the impending hike.

India crude basket up almost 20% since June


Brent crude which was trading at $89 on June 21, 2012 has moved to $115 per barrel. A 25% hike in crude prices internationally. The Indian crude basket generally tracks Brent crude and is just a couple of dollars lower than Brent. The India crude basket has shot up almost 25% since June, tracking Brent Crude.

Rs 551 crore loss daily for Oil Marketing Companies

Oil Marketing Companies are incurring a daily loss of Rs 551 crores on under recoveries. These companies have made huge borrowings, which are to the tune of Rs 1,57,617 crore at the end of the quarter ended June. These set of companies facing a ratings threat due to the detrioratign state of their finances and this could increase their cost of borrowings.

Fiscal deficit threatens to go out of control

If there is no fuel hike the fiscal deficit is likely to spiral out of control. The government has projected deficit of 5.1% of GDP in its budget for 2012-2013. However, if international prices of crude remain at elevated levels and domestic fuel prices are not raised the budget deficit could spin.out of control.

Rating agencies may downgrade India

If there is no fuel price hike, in all probability international rating agencies would downgrade India's sovereign rating to junk, citing lack of fiscal consolidation. S&P has already changed India's rating outlook to negative and is likely to review India's rating in the next few months.


RBI will not act without fiscal consolidation

The RBI is not likely to cut repo rates if there is no fiscal consolidation on the part of the government. If repo rates remain high it could dissuade fresh investments in the economy, thus pulling down growth further.

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