India allows retailers to raise subsidized diesel prices

Updated 18 January 2013
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India allows retailers to raise subsidized diesel prices

NEW DELHI: India's government gave fuel retailers some leeway yesterday to raise prices of heavily subsidized diesel, distancing itself from an unpopular policy ahead of elections while trying to revive an economy growing at its slowest pace in a decade.
Fuel subsidies are a drain on India's finances and the government is struggling to bring the deficit within a target of 5.3 percent of gross domestic product for the financial year ending March. India is the world's fourth biggest oil importer.
The government emphasized that any price rises would be small, raising questions over how much freedom the state-run oil firms will really have. Petrol largely remained under government control after a similar policy was introduced in 2010.
Oil Minister Veerappa Moily said the new system gave oil companies some liberty to set prices, but cautioned that diesel subsidies could not be suddenly ended.
"We cannot abruptly put an end to the subsidy or the under-recovery. Looking into all the economic aspects, we have taken the decision to give oil companies the liberty to make small corrections," he said.
Share prices rose sharply in India's main oil marketing companies, which suffer losses selling fuel below cost. The rupee hit a one-month high, while yields on Indian bonds dropped in a sign the market expects the new policy will result in lower subsidies in the medium-term.
The government also loosened a cap introduced in September on the number of subsidized cooking gas cylinders permitted to each household after widespread criticism the quota was unfair on the poor.
The cap will now be nine cylinders per year, up from six. That is expected to add Rs. 93 billion ($ 1.70 billion) to the annual subsidy bill, an oil ministry source said.
"This is a brilliant balancing act between politics and economics. This is one step backward and one step forward," said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy.
"While the decision on the LPG cylinder will pacify their political constituency, the decision on diesel sends out a message to the (central bank) that the government is serious about tackling subsidies and controlling the fiscal deficit."
The Reserve Bank of India (RBI) has long called on the government to reduce its fiscal deficit, which drives government borrowing and keeps upward pressure on interest rates. The central bank meets on Jan. 29 to set monetary policy and has signaled that it is likely to cut interest rates.
Ratings agencies had threatened to strip India of its investment-grade credit rating if the government did not take steps to curb the widening fiscal deficit. Finance Minister P. Chidambaram has vowed that the deficit will not exceed 5.3 percent of GDP this financial year.
Prime Minister Manmohan Singh's government, which must hold general elections by early next year, is trying to revive Asia's third largest economy, which is set to grow at 5.7-5.9 percent this fiscal year, its weakest rate since 2002/03.
Singh was the architect of a wave of economic reforms in the 1990s credited with ushering in two decades of fast growth. In a new push since September to liberalize India's economy, he opened sectors, including retail and aviation, to more overseas investment and cut subsidies on fuel and rail fares.
India imports 80 percent of the crude oil it refines into diesel, about 3.7 million barrels per day, and benchmark Brent crude prices were at their highest annual average on record last year at around $ 111 a barrel, significantly raising its energy bill.
Diesel accounts for about 40 percent of India's fuel consumption, and the state-owned fuel retailers lose Rs. 9.6 (18 US cents) for every liter of diesel sold.
Chidambaram said he did not know when, or by how much, diesel prices will be increased but said consumers should not fear big jumps. "I emphasize the word 'small'. Small corrections from time to time. That I believe the petroleum ministry has allowed the oil companies," he told reporters.
Diesel demand has been very resistant to price hikes. A Rs. 5 per liter price hike in September was followed by month-on-month rises in diesel sales.
The government liberalized petrol prices in June 2010, but has often prevented costs from being raised to reflect rising oil prices on global markets.
Fuel subsidies comprised more than 5 percent of the government's budget spending in previous 2011/12 budget. Asked if raising diesel prices would affect this year's subsidy bill, Chidambaram said the effect was so far unclear.
"I am proceeding on the basis that the subsidy bill remains the same. When they will make the small corrections, how much, I cannot say," he told reporters.


Merkel seeks united front with China amid Trump trade fears

Updated 22 May 2018
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Merkel seeks united front with China amid Trump trade fears

  • Merkel seeks common ground to ward off trade war
  • Plans complicated by US policy moves

Chancellor Angela Merkel visits China on Thursday, seeking to close ranks with the world’s biggest exporting nation as US President Donald Trump shakes up explosive issues from trade to Iran’s nuclear deal.

Finding a common strategy to ward off a trade war and keep markets open will be Merkel’s priority when she meets with President Xi Jinping, as Washington brandishes the threat of imposing punitive tariffs on aluminum and steel imports.

“Both countries are in agreement that open markets and rules-based world trade are necessary. That’s the main focus of this trip,” Merkel’s spokeswoman Martina Fietz said in Berlin on Friday.

But closing ranks with Beijing against Washington risks being complicated by Saturday’s deal between China and the US to hold off tit-for-tat trade measures.

China’s economic health can only benefit Germany as the Asian giant is a big buyer of Made in Germany. But a deal between the US and China effectively leaves Berlin as the main target of Trump’s campaign against foreign imports that he claims harm US national security.

The US leader had already singled Germany out for criticism, saying it had “taken advantage” of the US by spending less than Washington on NATO.

Underlining what is at stake, French Economy Minister Bruno Le Maire warned the US-China deal may come “at the expense of Europe if Europe is not capable of showing a firm hand.”

Nevertheless, Merkel can look to her carefully nurtured relationship with China over her 12 years as chancellor.

No Western leader has visited Beijing as often as Merkel, who will be undertaking her eleventh trip to the country.

In China, she is viewed not only as the main point of contact for Europe, but, crucially, also as a reliable interlocutor — an antithesis of the mercurial Trump.

Devoting her weekly podcast to her visit, Merkel stressed that Beijing and Berlin “are both committed to the rules of the WTO” (World Trade Organization) and want to “strengthen multilateralism.”

But she also underlined that she will press home Germany’s longstanding quest for reciprocity in market access as well as the respect of intellectual property.

Ahead of her visit, Beijing fired off a rare salvo of criticism.

China’s envoy to Germany, Shi Mingde, pointed to a “protectionist trend in Germany,” as he complained about toughened rules protecting German companies from foreign takeovers.

Only 0.3 percent of foreign investors in Germany stem from China while German firms have put in €80 billion in the Asian giant over the last three decades, he told Stuttgarter Nachrichten.

“Economic exchange cannot work as a one-way street,” he warned.

Meanwhile, looming over the battle on the trade front is another equally thorny issue — the historic Iran nuclear deal, which risks falling apart after Trump pulled the US out.

Tehran has demanded that Europe keeps the deal going by continuing economic cooperation, but the US has warned European firms of sanctions if they fail to pull out of Iran.

Merkel “hopes that China can help save the atomic deal that the US has unilaterally ditched,” said Die Welt daily.

“Because only the giant emerging economy can buy enough raw materials from Iran to give the Mullah regime an incentive to at least officially continue to not build a nuclear weapon.”