New Delhi: In a steep hike, the government on Saturday hiked diesel price by Rs 3 per litre, domestic LPG by Rs 50 per cylinder and kerosene by Rs 2 per litre and slashed customs and excise duties on crude oil and products, sacrificing Rs 49,000 crores in revenues.

The increase, decided at a meeting of the Empowered Group of Ministers headed by Finance Minister Pranab Mukherjee, is exclusive of local sales tax, Oil Minister S Jaipal Reddy told reporters here.

Diesel price in Delhi will be hiked by Rs 3.40 per litre to Rs 41.15 a litre with effect from Saturday. Rates will vary at cities due to differential rates of VAT/sales tax.

Besides the price hike, the EGoM decided to abolish the 5 per cent customs or import duty on crude oil, and slashed the same on diesel and petrol by 2.5 per cent from 7.5 per cent.

Also, excise duty on diesel was cut from Rs 4.60 per litre to Rs 2 a litre.

Reddy described the hikes, which had become necessary in view of a rally in international crude oil price, as "very modest and minimal".

The decision to cut customs duty on petrol also meant that the Rs 1.98 per litre hike needed to level retail prices with their cost would no longer be required, he said.

The reduction in excise duty on diesel would lead to a revenue loss of Rs 23,000 crore this fiscal, while in the customs duty cut the government will forego Rs 26,000 crore.

The price hike would help the oil companies limit their revenue loss by Rs 21,000 crore, but they still would end the fiscal with about Rs 1,20,000 crore of revenue loss.

Oil Secretary GC Chaturvedi said the hike in price of diesel would add 0.3-0.4 per cent increase in inflation which is already hovering around 9 per cent, more than twice the rate in the US and almost four times of Germany's.

A 14.2-kg domestic LPG cylinder now costs Rs Rs 345.35, while kerosene is priced at Rs 12.32 per litre in Delhi.

Asked about the political fallout of the hike, Reddy said, "Political problem will always be there. Economic problem will not wait for solution to political crisis."

Despite a steep hike of Rs 50 per cylinder in LPG rates, which equals Rs 50.55 increase by the then NDA government led by Atal Bihari Vajpayee government in March, 2000, domestic
cooking gas will still be cheaper compared to that in the neighbouring countries.

LPG in Pakistan costs Rs 611.40 per cylinder, Rs 484 in Bangladesh, Rs 878.90 in Sri Lanka and Rs 821 in Nepal.

Similarly, the Rs 2 per litre hike in kerosene price, which comes on the back of last year's Rs 3 per litre raise, would raise rates in Delhi to Rs 14.32 per litre, still cheaper than Rs 43.95 in Pakistan, Rs 27.81 in Bangladesh, Rs 25.12 in Sri Lanka and Rs 42.61 of Nepal.

"I am sandwiched between economist on the one hand and populist on the other. Economist will say why only Rs 2 per litre increase in kerosene, while the populist will say why did you increase by even Rs 2 per litre," Reddy said.

"Consumers can easily absorb the hikes announced today."

Asked how he managed to convince the finance ministry to forego revenues in a difficult year, he said, "I will not give you a glimpse into my kitchen. I will only serve the dishes."

"The only inflationary item is diesel. The hike is minimal," Reddy said, adding the basket of crude oil India buys has averaged USD 113 per barrel this quarter as against USD 75 per barrel at the time of last increase almost a year ago.

Friday’s hike in diesel and LPG rates, the first in almost a year, comes on back of last month's steep Rs 5 per litre increase in petrol price to Rs 63.37 per litre in Delhi.

The same EGoM had a year ago freed petrol price from government control and since then they have risen 23 per cent.

The current price of Rs 63.37 a litre in Delhi was short of its cost by Rs 1.98 per litre but the cut in customs duty has negated the required price increase, he said.

The increase in price of diesel, the most used fuel in the country, will stoke inflation. Diesel is the preferred fuel for transportation in the country and an increase in the price will lead to increase in transportation cost of almost all commodities. It has a 4.7 per cent weight in the benchmark wholesale-price index and petrol 1.1 per cent.

State-owned fuel retailers were losing Rs 456 crore per day on selling diesel, domestic LPG and kerosene at government controlled rates before today's decision.

Chaturvedi said oil firms were losing Rs 13.72 per litre on diesel and the price hike together with customs duty and excise duty cut would lower the revenue loss to Rs 6.22 per litre. Similarly, they were losing Rs 26.66 per litre on kerosene and Rs 381.14 on every 14.2-kg domestic LPG cylinder.

"There still will be under-recoveries (losses) even after the price hike and duty cuts," he said.

Fuel price hikes 'modest': Pranab

Calling the hike in prices of petroleum products as "modest", Finance  Minister  Pranab Mukherjee expressed hope that state governments would reduce their taxes to provide relief to consumers.

 The government increased diesel price by Rs 3 per litre, domestic LPG by Rs 50 per cylinder and kerosene by Rs 2 per litre. It also slashed customs and excise duties on crude oil and products, sacrificing Rs 49,000 crore in revenues.

"(It is) very modest increase. I have taken the risk of reducing the duties substantially... I think it will be around Rs 49,000 crore on account of reduction of import duty and also the excise duty," Mukherjee told reporters after the hikes were announced.

He added, "I do hope the states will also reduce their VATs (Value Added Tax) so that relief could be given to the consumer."

Opposing the hike in diesel prices, Delhi Petroleum Association has urged the Delhi government to immediately reduce VAT so as to minimise its impact on inflation.

The hike is likely to push up overall inflation in the coming weeks.

Overall inflation rose to 9.06 per cent in May from 8.66 per cent in the previous month. Besides, food inflation for the week ending June 11 had touched a two-and-half-month high of 9.13 per cent.

BJP to hold demonstrations

BJP announced that it would hold protest demonstrations on Saturday across the country against the hike in prices of diesel and LPG, and dared the UPA allies opposing the move to leave the alliance as a mark of support to the common people.

"BJP President Nitin Gadkari has announced that the party will hold protests from the district to the national level across the country against the hike," BJP vice-president Mukhtar Abbas Naqvi said.

He alleged that the hike has been announced by the government to "serve the interest of the oil mafia".

"In the last one year, the government has increased petroleum prices ten times. While the common man is bearing the brunt of price rise, the government has now added fuel to fire," Naqvi said.

Describing the hike in diesel and LPG prices by the Government as an "inhuman step", BJP spokesperson Nirmala Sitharaman said, "The increase will also affect India's growth story."

The BJP also dared the UPA allies opposing this price hike to come clear on their stand and leave the alliance in support of the common man, instead of doing mere lip service.

"The step to increase the LPG and diesel prices is an inhuman step, considering that this government has not taken any measures to contain food inflation," said Sitharaman.

She said the hike will have a cascading effect on inflation. "This government is not looking at controlling inflation and is only focussed on growth, which will also be affected with this hike".

Terming the government as "cruel and insensitive" towards the common man, Sitharaman said , "The aam aadmi will be badly affected due to this hike. The inhuman step has come
at a time when the government has not attended to controlling inflation."

Price hike to fuel inflation

The hike in prices of petroleum products, including diesel and cooking gas, is likely to have
upward pressure on inflation, that crossed 9 per cent mark in May, experts said.

"It (the hike) will increase inflation by about 50-60 basis points," Crisil chief economist D K Joshi said.

With volatility in crude oil prices in global market, the hike in petroleum product prices was widely expected.

"Inflation was being artificially suppressed (as the price hike was being delayed," Joshi added.

Experts said that hike in price of diesel, kerosene and LPG would only increase the inflationary pressure on the economy. They said headline inflation in June is likely to cross 9.5 per cent.

Reacting on increase in rates of petroleum products, the Left parties said they will organise nationwide protest against hike in prices of diesel, kerosene and cooking gas.

They said the price hike was "completely unacceptable".

Overall inflation rose to 9.06 per cent in May from 8.66 per cent in the previous month. Food inflation for the week ending June 11 had touched a two-and-a-half-month high of 9.13 per cent.

JPN/Agencies