India is the 10th largest oil importing nation in the world (oil imports are close to 70% of its crude oil requirements). If the average price of crude oil for FY09 is $105 / bbl, then, it will result in the FY09 trade deficit coming in at US$115bn.
According to Citi,US$1/bbl increase in oil prices results in the trade deficit widening by US$700mn. Therefore, assuming a US$15/bbl increase in the Indian basket to US$120/bbl, the import bill would rise by an additional US$10.5bn, taking the CAD to US$47.3bn or 3.6% of GDP.
To be in-line with international trends, auto fuels need to rise 18% for petrol and 43% for diesel.However given political compulsions, this is unlikely to take place. As far as the fisc is concerned, to compensate the oil marketing companies for the under-recoveries, the government is likely to issue oil bonds to the tune of Rs630bn in FY09.
How much LPG, Kerosene, Diesel and Petrol Contribute to Inflation ? See Chart below.
Overall, if the above fuel prices are changed to be in-line with international prices, they will contribute 4.70% to Inflation and the Government can never do this but burn deep hole in its own pocket. Additionally, the Indian Rupee is expected to become weaker on account of higher deficits.
Why does the Govt. not reduce excise duty?
govt wont reduce duty because, this duty is their one of main sources of revenues for govt spendings.