Petrol and diesel price increases will be lower because of the sales tax cuts

New Delhi/Calcutta, June 4: The long-feared oil price increase was announced today but the blast from Delhi was outgunned by the boom of twin bandhs in Bengal — and only in Bengal, among the larger states.

The Manmohan Singh government raised the price of petrol by about Rs 5, of diesel by about Rs 3 and of cooking gas by Rs 50 a cylinder. The increases would perhaps have been more had it not simultaneously announced waiver of the 5 per cent import duty on crude oil and a Re 1 cut in excise duties on petrol and diesel.

Not to be outdone, the Buddhadeb Bhattacharjee-led government in Bengal reduced sales taxes on petrol and diesel, which will directly benefit consumers. Instead of the Rs 5 rise in petrol price the consumer would have had to bear, the burden will be Rs 2.12 less and for diesel, instead of Rs 3, about Rs 1.38 less.

Similar benefits from the cuts in central taxes will not accrue to the consumer because these will be diverted to oil companies groaning under losses from rising international prices that they have been subsidising in the domestic market.

Without these cuts, prices would have had to be raised by Rs 16 a litre, according to some estimates, to narrow the gap between international and domestic prices.

Amid calls for rollback and the Prime Minister’s resignation, Manmohan Singh found the occasion momentous enough to speak to the nation, describing the step as “inevitable”.

“It must be appreciated what has been done is the bare minimum with a substantial burden being borne by the government and the oil companies.”

While the BJP likened the increase to “unleashing economic terror” on the nation, the Prime Minister faced worse from his allies. Prakash Karat, the CPM general secretary, said: “This is not a marginal hike, this is a substantial hike and it will have a very deleterious effect on the people who are already suffering from the price rise of essential commodities.”

Other allies, such as Lalu Prasad’s RJD and the DMK, also opposed the increase.

“I know that the price increases we have had to announce today will not be popular, even though they are only modest,” Singh said.

His friend and foe in Bengal were faster on the bandh draw than anyone else. CPM state secretary Biman Bose took about half an hour to declare a 12-hour general strike on Thursday. “We had already indicated that our big decision was coming since the government didn’t pay heed to the Left,” Bose said around 1pm while the price hike became known just before 12.30.

Mamata Banerjee woke up a little late to the hike in Delhi and halt in Calcutta, announcing at 3pm her bandh-for-bandh response even while she described the CPM’s decision as “cheap drama”.

“Sarkare theke CPM jadi bandh dake, amra birodhira ki labenchus chusbo (If the CPM being in government calls a bandh, should we in the Opposition suck lozenges)?” she said.

The people of Bengal have the choice — shoved down their mouths — of sucking on the double price hike for oil and cooking gas and the double bandh of 12 hours each on consecutive days.

Further blows may be waiting round the corner with the oil price rise expected to raise the rate of inflation to around 9 per cent.

If the CPM had made up its mind about a bandh even before the price increase was announced, the government led by it had possibly decided on a sales tax reduction in advance too.

Finance minister Asim Dasgupta announced sales tax cuts on petrol and diesel in the evening, cushioning the blow of the price rise to an extent.

NDA-ruled Bihar is also reducing the tax and Maharashtra, where the Congress is in power, is planning to follow suit.

Bengal’s decision, which the chief minister might hope would touch a popular chord while the price rise drives the anger towards Delhi, came even before the Prime Minister made an appeal in his speech to states to wind down their levies.

Some political observers, however, believe that the United Progressive Alliance government had announced hikes that were being seen as steep only to keep room for backtracking to an extent. Other than the pressure from the allies, a general election is scheduled in less than a year.

Even after the price rise and duty cuts, however, the government will have to pay the petroleum companies about Rs 94,600 crore in oil bonds to compensate for the losses they suffer.

The Prime Minister said: “There are limits to which we can keep consumer prices unaffected by rising import costs. Our oil companies cannot go on incurring losses. This way they will have no money to import crude oil.”

Why is crude hovering above $130 a barrel?

• Strong demand for petroleum products, especially for diesel in China and India
• World oil demand is placed at 86.8 million barrels per day, growing at 1.2 per cent a year
• Crude oil consumption in India is growing at over 12 per cent a year
• Oil-producing nations are not raising output quickly enough to keep pace with rising demand
• Heavy speculation by energy traders on global markets; an investigation into these transactions has already been ordered in the US. Opec has also accused oil traders of manipulating prices