India raised diesel prices nearly 8 percent on Friday after months of delay, a politically unpopular move that will add to inflationary pressure but also eases the government's subsidy burden and could bolster its image among wary investors.
Oil prices fell 6 percent on Thursday after major consuming countries announced an emergency release of stocks, only the third time ever, pushing benchmark crude to a four-month low. "This is the only window they have for any cutting of subsidies. By the end of the year they will be in (state) election mode," political analyst Mahesh Rangarajan said.
Since it was first elected in 2004, the government of Prime Minister Manmohan Singh has more often than not refrained from pushing through tough reforms in favour of pleasing its predominantly rural voter base. Since the government agreed in principle to lift fuel costs a year ago, international crude prices have soared 39 percent, swelling the money spent on subsidising fuel prices to a country with 500 million people living in poverty.
Petrol prices, which largely affect more affluent Indians, have gone up about 23 percent since they were freed a year ago. J.P. Morgan has already cut its forecast for benchmark Brent oil for the third quarter to $100 a barrel from $130 but on Friday global crude prices paused from losses. With inflation above 9 percent and domestic fuel costs up nearly 13 percent on the year, raising prices would immediately hit the fractious coalition's core voters among India's poor, who live on less than the cost of 2 litres of diesel a day.
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