Asia-Pacific News

India Plays Politics With Petrol Price Cut

James Fontanella-Khan in Mumbai

Indian state-controlled refiners cut petrol prices for the first time in three years on Wednesday, after one of the ruling Congress party’s key political allies threatened to quit the alliance over recent price hikes.

Bombay Traffic
Neil Beer | Photodisc | Getty Images

However, the cut in petrol prices – equivalent to around 3 per cent – is unlikely to have a significant impact on India’s rampant inflation, which has remained near double digit levels despite 13 rate increases by the country’s central bank since March 2010.

Fuel prices account for just 1.09 per cent of the wholesale price index, which is the benchmark measure of inflation. Gasoline accounts for only 10 per cent of all fuel use in India, while diesel is around 40 per cent.

The move will cheer India’s fast growing middle class, which has been particularly vocal against the prices hike, as they are the most affected by higher gasoline costs.

However, the government’s indirect intervention to reduce prices will be seen as a step backwards in its attempt to cut its high energy subsidies bill.

Although state-run fuel retailers have been free to set their own prices since June last year, when India decided to end state control over prices and allow them to move freely with global markets, any increase is still informally approved by central government.

Indian Oil Corp, Bharat Petroleum and Hindustan Petroleum, the country’s main state-owned refiners, said that the price reduction was due to favourable global market conditions and the depreciation of the rupee against the U.S. dollar.

The rupee has been Asia’s worst performing currency this year and on Wednesday it was trading at a 32-month low around at Rs50.9 against the dollar.

However, several analysts said the refiners were forced to cut prices following rising political pressures, with the Congress-led government forced to quell a revolt within its coalition over high fuel prices.

Mamata Banerjee, leader of the Trinamool Congress, which rules the eastern state of West Bengal and is the second-largest party in the Congress-led coalition, last week threatened to quit unless the government rolled back recent price hikes.

The cut is being viewed by analysts as a political move to boost the Congress party’s image ahead of elections next year in Uttar Pradesh, the country’s largest state with a population close to 200m people.

“They are playing pre-polls politics, this seems obvious,” said Deven Choksey, managing director at KR Choksey, a brokerage in Mumbai. “On the one hand they deregulate the petrol market and on the other hand they force the refiners to cut price ... this is ridiculous.”