New Delhi, April 7: The government is in a quandary over whether it should allow the national oil companies to go in for a hike in petrol and diesel prices.
While the issue will come up for discussion at tomorrow's cabinet meeting, the political compulsions facing the government could overshadow the economic logic for permitting a price increase.
With the price of the Indian basket of crude imports having crossed the $51.86-per-barrel mark during the first week of this month, public sector oil companies are seeking a Rs 5-per-litre hike in diesel rates and a Rs 4.50 per litre increase in the price of petrol.
Since diesel is used in the politically sensitive farm and public transport sectors and the price of petrol is already high due to the heavy levies on the 'rich man's fuel', such a sharp increase in prices will be extremely difficult for the government to allow.
However, even the move towards a modest increase to compensate oil companies for soaring crude prices is facing serious problems.
The Left parties have made it clear that they are opposed to a hike and, with the budget session of Parliament yet to conclude, the Opposition parties are bound to extract political mileage from such an unpopular decision.
Besides, the rabi harvest season is in full swing in the country and the farm sector consumes large quantities of diesel to carry out mechanised threshing operations. Any increase in the price of this fuel will hit the ruling party's vote bank. It will also have a cascading effect on the public transport sector and lead to a cost-push effect on the price of essentials which are moved by trucks.
The oil companies have been clamouring for a price increase for several months now and the average price for crude had crossed $58 per barrel during March this year.
The downstream oil marketing companies ' Indian Oil , Hindustan Petroleum and Bharat Petroleum ' claim they have collectively faced an erosion of Rs 18,000 crore in their bottomlines during the last financial year as they have not been allowed to charge international prices for petrol, diesel, LPG and kerosene.
However, the flip side of the coin is that these companies are still making profits. Although the size of their profits has plummeted during the current fiscal, they are still raking in more than what they earned during the administered price regime prior to 1997.