Manmohan Singh’s first challenge is to control the adverse effect of escalating petroleum prices on the Indian economy and inflation. NDA held on to artificially low petroleum prices to win the election. Now UPA is under pressure from the left front to hold the line.
Internally state owned enterprises made a lot of money last year and is losing all that and some more this year. The Prime Minister and Finance Minister met in close doors for 45-minutes on this issue and have discussed the grave situation. They plan to keep quiet and very cunningly increase the petrol, Kerosene, Diesel and Cooking gas prices. Publicly they indicated that they are looking into ways to cushion the impact of the spurt in global oil prices on domestic petroleum products prices. A reduction in customs duty on petroleum crude and excise on petroleum products is among the measures which are being examined for this purpose. However, internally reliable sources tells us that Rs 3.53 per litre increase in petrol prices - from Rs 33.71 to Rs 37.24 and Rs 2.25 per litre in diesel prices - from Rs 21.74 to Rs 23.99 per litre - in Delhi is inevitable. The retail price of cooking gas of Rs 241.30 per cylinder in Delhi is short of cost by Rs 130 while under-recovery in kerosene is about Rs 4 per litre. According to international crude oil and Natural Gas expert Bob Seigel, India will be lucky to hold prices down to that level, Most likely crude oil price will move to $60 per barrel by end of the year with similar rise in Natural Gas. The main cause will be demand from India and China and scarcity caused by terrorism in Saudi Arabia and other countries. If that happens, the petrol price will have to be raised to Rs 60 per litre. Even then the state owned enterprises will run short of money. 
The gamut of issues, including the customs and excise duty structure with regard to petroleum crude and products and the government subsidy on kerosene and cooking gas, are believed to have been discussed in detail at Monday's unscheduled meeting. 

Chidambaram is preparing to present the budget for 2004-05 in the first week of July, but it seems the government would like to get over the pressing issue of domestic petroleum products price revision well before that. 

Petroleum Minister Mani Shankar Aiyar was not present at the meeting on Monday. Aiyar has, however, gone on record saying the decision would be taken only after June 3 when OPEC, the international oil producers' cartel, met to consider a production hike in response to the spurt in global prices - more than $6 now to over $41 a barrel since January 1. 

After the Administered Price Mechanism (APM) was dismantled in 2002 following the policy roadmap drawn up by the United Front government in 1997 in which Chidambaram was the finance minister, domestic oil marketing companies were free to fix retail domestic prices of petrol and diesel on import-parity basis. 

Kerosene and cooking gas prices remained subsidised by the government. Their prices have remained frozen for two years. Oil companies have been complaining of inadequate government subsidies on this count. 

The oil companies had been following a schedule of fortnightly revision of domestic prices on 1st and 15th of every month in tune with the movement of global crude prices. 

Domestic prices of petrol and diesel were last revised on January 1, after which the process halted because of the Vajpayee government's intervention. 

The state-owned oil marketing companies have claimed that they have been incurring a lower recovery of about Rs 450 crore a fortnight because the higher cost of procuring oil products compared to the selling prices in India . 

Officials, however, pointed out that the oil-marketing companies had made "super profits" last year under the price decontrolled regime. Some argued that these companies could be in a position to partly absorb the higher costs. 

After the one-on-one closely guarded meeting with the Prime Minister, Chidambaram declined to comment saying, "I will not comment. We will tell you when necessary."