*Flowing into finances * **
** ** ** ** * ------------------------------ ** The hike in the price of petrol and diesel may appear bad news but there are benefits if one sees the larger picture. * ------------------------------ With oil companies allowed to freely price petrol, you can expect a lot more bunks in your city and highways. Srividhya Sivakumar If you thought the impact of the government's move to partially deregulate oil prices holds relevance only as far as your travelling costs are concerned, here's some piece of news. Besides the obvious and perhaps the inescapable pinch to your wallets, the move holds significant relevance (very positive ones at that) if one were to see the larger picture. >From helping oil marketing companies reduce losses, an almost given occurrence in the balance sheets since fuel prices were artificially kept low, to helping the government reduce its fiscal deficit and reallocate revenues for other reforms, this single move has many positives attached to it. In short, while it may be a bitter pill now, it has the potential to morph into a long-term sweetener. All in the name of ‘greater good' No doubt, the Rs 3.50 and Rs 2 per litre hike in the price of petrol and diesel is not a piece of news to cheer about, especially when monthly grocery bills are spiralling upwards anyways (that monster named inflation!). But tweak your perspective a little and you would be able to spot the silver lining. How? Well, let's start with a little business lesson first. Say, you were running a business of selling soaps. Would you buy soaps at a higher price and sell at a lower price? No, that doesn't make much business sense, none for that matter. Extend the same logic to state-owned oil marketing companies and you would begin to appreciate the government's move. After all, why should state-owned oil companies sell petrol and diesel at a low price when they pay a much higher price to procure it? With politics having had an upper hand over economics most of the times, these companies have no choice but to sell subsidised fuels. And so they make losses. But when they begin to bleed a little too much, the government steps in for the rescue by dishing out off-balance sheet oil bonds to them. By doing this, while the government shares the under-recoveries, it also ends up inflating the nation's debt. So far fine, but you may ask, it wasn't as if the government had kept the fuel prices lower even when international prices were soaring, right? There are, after all, umpteen instances of fuel price hikes in the past! So, what explains this move to suddenly adopt a free-pricing model? Well for one, it takes time for the government to hike or lower fuel prices and by the time it does, oil companies would already be bleeding. Second, the move was not sudden. It has long been under contemplation and actually much-awaited too. Besides, it isn't the first time the government is taking a step towards oil price deregulation. It had, in April 2002, done away with the administered pricing mechanism and brought in free pricing mechanism for petrol and diesel. Political compulsions, however, got the better of the government as it stopped the free pricing almost as soon as crude prices began to increase in 2004. Also, quite a few economists have lauded the move since it would help put the country's finances in better shape. Yes, household finances may have to be readjusted to absorb the price hike, but you can perhaps feel better that it would help our country. Just so that you get a good perspective on how exactly this would help the country, consider this. According to a research report put out by Ambit Capital, the under-recoveries are expected to go down from Rs 64,184 crore to Rs 50,248 crore in FY11. That's 22 per cent lower! They expect the decline to be even higher in FY12 (42 per cent). The nation's finances would improve more if the government goes ahead with the stipulated plan of deregulating diesel prices (time lines not known yet). Though the EGoM (Empowered Group of Ministers) hasn't yet revealed the proportion of subsidy sharing in the new regime, analysts and brokerage houses have, in no time, re-rated the earnings growth potential for oil companies. That's another reason to cheer; that is if you are invested in oil companies. Bunks to acquire omnipresence So much for macro mumbo jumbo, but what's in it for you? Well, with oil companies allowed to freely price petrol, you can expect a lot more petrol bunks in your city and highways. There already are reports of private oil companies such as Reliance Industries, Essar Oil, and Shell reopening and even expanding their retail presence. Even the state-owned oil companies are looking to add outlets. The higher competition, thanks to the now levelled playing field, would mean that you as a consumer could expect better service and high quality fuels. Besides, with the number of retail outlets expected to increase, it would probably be safe to assume that you may no longer need to stand in long queues at petrol bunks — a definite plus for the less patient ones amongst us! What happens to inflation? It would, however, be foolhardy to think that the price hikes in petrol, diesel, kerosene, and LPG will not be reflected in the inflation numbers. But just as well, with the four products enjoying about 5.4 per cent weight in the WPI, the direct impact of the hike would be about 80-90 basis points. The indirect impact that would come in the guise of increase in costs of corporates, however, could be significant. For instance, power, fuel, and freight charges of BSE 500 companies accounts for up to 8 per cent of their total cost; it is even higher for Sensex companies at 12 per cent. So even as most companies would like to pass it on to the end consumers (yes that would be us eventually), they would also be impelled to look at avenues to rationalise costs. After all, with the free fuel pricing becoming a regular affair, corporates cannot really function by passing on price hikes at will. So, while inflation would play spoilsport in the near-term, one can expect a happy ending in the long run with companies and consumers keeping a tight leash on their expenses. And that may not be very difficult for survivors of one of the worst recessions of our times. http://www.thehindubusinessline.com/iw/2010/07/04/stories/2010070451251200.htm -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en.
