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Wednesday, November 14, 2007

High oil prices pose risk for India policy, economy

India's foot dragging over ways to limit losses at state-run oil refiners who are selling cheap fuel at a time when global crude is at giddy new highs poses a risk for public finances and the booming broader economy.

Bleeding more than $50 million a day, firms like Indian Oil Corp are in dire need of rescue but a government facing elections in a key state in December is shying away from the most obvious response -- a hike in state-administered fuel prices.

India is this year yet to raise prices of widely consumed transport and cooking fuels, kept low to protect poor consumers and help fight inflation, while crude oil has jumped to around $95 a barrel.

On Monday, Oil Minister Murli Deora said officials were attempting to minimise any rise in fuel rates when it does respond -- maybe this week -- but analysts said other approaches were not risk free.

"They might reduce the import duty. This would mean a loss of revenue and put pressure on the fiscal deficit," said D.H. Pai Panandikar, an analyst with independent think-tank RPG Foundation.

"The long-term solution is to reduce demand and increase prices. But the government is hurting itself. For them party is above the nation."

The Congress party of the prime minister, Manmohan Singh, which leads the ruling coalition, has been badly bruised in recent weeks by a row with communist allies over a nuclear energy deal with the United States that still could tip the country into early parliamentary elections.

India levies a 5 per cent import tax on crude, and taxes make up 32 percent of diesel prices and 54 percent of petrol prices.

Another possible escape route would be for the government to issue more of the bonds it routinely uses to partially offset the losses of state fuel companies.

But economists say this would end up increasing India's fiscal burden and only buy time.

"They will have to issue more oil bonds, which is nothing but pushing ahead the inevitable," said Shubhada Rao, chief economist at Yes Bank in Mumbai.



Hard times ahead

The Reserve Bank of India (RBI) has said it is imperative to pass on some of the increases in global crude prices to domestic consumers.

The Indian crude basket has risen by 145 per cent since April 2004, but retail prices of petrol have gone up by just 29 percent and those of diesel by 40 percent. India imports 70 percent of its crude requirements.

Falling US stocks as winter approaches and tensions in the Middle East could push crude beyond $100 a barrel, traders say.

China, which like India forces its state oil firms to shoulder any losses from refining costly imported crude, surprised markets with a 10 percent price rise last week.

And economists say with headline inflation at five-year lows close to 3 percent, India has room to follow suit.

"The overall impact of a likely revision on domestic fuel prices on headline inflation rate is expected around 40 basis points," said Rao.

"I think the options are ... limited considering the extent of losses of the oil marketing companies. So they may have to use a combination of measures, of which price revision is an important one."

Oil firms are lobbying to pass on higher cost to consumers.

"If the domestic prices do not increase, the under-recoveries will go up further in November. Let the consumer pay one-third of the under-recoveries," said Indian Oil Corp Chairman Sarthak Behuria.

Economists estimate that despite an improvement in the fiscal deficit over the past three years, off-budget items such as oil and food bonds, fertiliser subsidies and losses of state power firms add up to 2 percent of gross domestic product.

"The economy's unexpectedly strong growth over the last four years has complemented some fiscal reforms to improve public finances," Rajeev Malik, analyst at JP Morgan in Singapore, said in a research note.

"However, the actual improvement is overstated because of higher off-budget spending."

The Manila-based Asia Development Bank estimates that every $10 rise in average global oil prices shaves off 1.1 percentage points from India's economic growth.

"If oil prices remain high it will definitely hurt growth. If they remain at current levels it would impact industrial production by as much as one percent," said Panandikar.

India Oct Revenue From Import, Excise Taxes Up 18.6% On Year

NEW DELHI -(Dow Jones)- India's revenue from import and excise tariffs rose 18.6% on year in October to INR196.46 billion from INR165.69 billion, a Finance Ministry statement said Wednesday.
Customs import tax revenue in October rose 24.7% on year to INR93.53 billion compared with INR75.03 billion a year earlier, the statement said.
Service tax revenue in September grew 39.8% to INR49.47 billion on year compared with INR35.38 billion.
From April-October, the first seven months of the current financial year, revenue from import and excise taxes grew 11.9% on year to INR1.2 trillion compared with INR1.09 trillion.
In the same period, revenue from import tax grew 17.4% on year to INR578.33 billion, while excise collection was up 7.5% at INR649.48 billion.
The Indian government aims to collect INR5.48 trillion in revenue from import, excise and service taxes in the current fiscal year to March 31, 2008.

Traders to import 300 tons of pepper from Sri Lanka

Colombo (PTI): Indian traders have contracted 300 tons of pepper import from Sri Lanka, an exporter said here on Wednesday.

As agreed upon the traders would receive 300 tons of pepper to meet their domestic requirement, a senior official of an exporting firm of the Island country said.

India has been importing duty free pepper from Sri Lanka from March 18, 2003, when import stood at 6,200 tons annually. Over the last two years the it has risen to 7,500 tons from 7,000 tons. However, stakeholders of the Sri Lankan Spice industry have now sought an assurance from the Ministry of Trade and Commerce here that no caps would be imposed for exports of the item to India.

India's MMTC floats tender to import 350,000 tonnes of wheat UPDATE

MUMBAI (Thomson Financial) - India's MMTC Ltd said it has floated a global tender to import 350,000 tonnes of wheat for delivery to Indian ports by Feb 10, 2008.

The tender was floated to build up the state-owned company's buffer stock and cater to the world's second largest consumer of the grain.

The tender will close on Nov 19 and bids will open the same day, MMTC said on its website.

'It makes economic sense to import wheat at this point in time as prices are on a corrective mode in the international markets,' said Avinash Raheja, senior vice president at Commtrendz Risk Management Services. He expects bids will be in the range of 425-440 usd per tonne.

Earlier, India had said it would import 1 mln tonnes of wheat by floating tenders via State Trading Corp, MMTC, and PEC Ltd.

In September, the country purchased 795,000 tonnes at a weighted average price of 389.45 usd per tonne from Glencore International AG, Toepfer International and Starcom (other-otc: SCME.PK - news - people ).

India Determined Not To Hike Gas Prices

MUMBAI - The Indian government’s decision not to hike gas and diesel prices, despite crude oil nearing $100 a barrel, is likely to deepen the losses of state-run refiners, which are maintaining prices at artificially low rates.

Ahead of state- and national-level elections, the Congress-led coalition is reluctant to pass on rising crude prices to Indian consumers. Last week, Prime Minister Manmohan Singh said the government needed to “restructure” subsidies in food, fertilizers and oil, which are expected to touch $25 billion this year. India’s crude oil "basket" (the cost of importing a blend of Brent sweet crude and Oman-Dubai sour-grade crude) is hovering at approximately $89 a barrel.

But on Tuesday, Petroleum and Natural Gas Minister Murli Deora spoke about a proposed price hike: “The objective is not to burden the aam adami (common man). It is some weeks [away]. It is not being done today.” A decision on prices will happen at an “appropriate time.”

Analysts say the government is unlikely to alter prices significantly before national polls in May 2009.

“We could see a reduction in import duties over the next few months, from the present levels of 5.15% to around 3%. They cannot allow these companies to bleed so much that their net worth gets washed [away],” said Niraj Mansingka, an energy analyst at the Mumbai-based brokerage Edelweiss Capital.

The three principal state-run companies-- Bharat Petroleum, Indian Oil Corp. and Hindustan Petroleum Corp.--took losses of 132.6 billion rupees ($3.37 billion) last quarter, Mansingka said. Indian Oil, with close to 50% of the market share, suffered the heaviest losses.

Reliance Industries and Essar Oil are the two private sector companies that manufacture and market gasoline and diesel. Reports from across the country said both companies had raised rates by between 1 rupee and 5 rupees (3-13 U.S. cents) per liter. Though neither company officially confirmed the hike, their spokespersons said they were making heavy losses because of an absence of state subsidies.

The government hasn’t allowed state-run companies to hike prices this entire year. If the entire rise in oil prices were passed on to consumers, inflation could jump by an estimated 1.5 percentage points. (See: “ Inflation Cools In India”) The central bank wants to keep inflation below 5% this year.

State-run refiners are reportedly expected to meet a third of the increase in costs, while the government will subsidize the rest. The appreciation of the rupee, which has soared more than 12.5% against the dollar this year, helped mitigate losses. Crude prices increased around 16% in the same period.