The talk of an increase in retail fuel prices has gained ground over the last few days and todays EGOM meeting is likely to affect the changes. Although the increase in fuel prices is taken as a reformist measure I believe that the increase in fuel prices at this point of time is a bad decision as the fuel price increase is being asked based on crude oil price of USD 85 per barrel and the loss figures being touted around are based on that crude oil prices. However the reality is that the current crude oil prices are 20% lower at USD 70 per barrel and is flat vis a vis one year back i.e. in June 2009. However despite the crude oil prices being flat over the last one year the fuel inflation in India stands at 12% plus and a increase in prices at this point of time might take it at 15% plus.
As the Indian economy is recovering from a slump and the Chinese economy is slowing down and the revival in Western economies is doubtful the likelihood of a massive spike in crude oil prices is highly unlikely and as such any one shot big increase in fuel prices in uncalled for.
Instead the government should go in for a decontrol which will involve, like the fertilizer policy a freeze on prices for a period of time followed by market linked prices. The other option is to increase prices at the rate of Rs 0.5 i.e. 50 paise per month over the next 4-5 months till prices reach import parity. Given the outlook of soft crude oil prices any increase in prices of petrol and diesel is uncalled for.
Given the likelihood of a normal monsoon the food inflation is likely to soften over the next few months and during this period fuel prices can be increased slowly. The target should be more on the household gas and kerosene prices where there is a huge leakage of subsidy due to the huge distortion in controlled vis a vis market prices. A phase wise decontrol of these prices in small steps over the current financial year will make more sense and will be accepted much better by the public in general.
Markets are still gyrating to the newsflow from Europe. Fundamentally markets are looking extremely promising and any sell off should only be a buying opportunity.
