India mulls over 3-4% electricity tariff hike

This quarterly increase will save the government IDR 12trn in subsidies.

According to DBS, brent crude oil prices have rebounded sharply from below USD 100/bbl in early June to USD114/bbl currently. This came on the back of an improvement in risk appetite and there are fears that an announcement of QE3 by the Fed could push commodity prices even higher.

Here's more from DBS:

This would have implications on the government’s energy subsidy policy. When viewed in rupiah terms, oil prices are starting to approach the threshold where calls for fuel price hikes and electricity tariff hikes start to come to the fore. This was the case in early 2012 and late 2010/early 2011 and it is not surprising that the government is already talking about potential hikes in electricity tariff rates in 2013.

The amount of energy subsidies allocated for the 2013 budget stands at IDR 274.7trn, up by more than IDR 70trn from 2012. However, the increase is actually exaggerated considering that the government has not implemented any electricity tariff or fuel price hikes this year.

Accordingly, this means that total energy subsidy spending for this year is probably going to be closer to IDR 300trn. A plan to increase electricity tariffs by 3-4% each quarter (taking the cumulative increase to 15% by end-2013) is currently in the works, saving the government IDR 12trn in subsidies.

However, this will not be enough for the government to meet the budgeted subsidy amount considering that fuel subsidies make up the lion’s share.

With the rupiah about 10% weaker against the USD compared to the same period last year, the threshold where oil gets uncomfortably high is lower in USD terms. Oil prices above USD 120/bbl for an extended period (3-4months) will likely bring out talks about a potential 30% hike in subsidized fuel prices again.

Our core inflation scenario anticipates no change in the energy subsidy policy, noting that resistance to change in this policy has always been present. Moreover, the fiscal position is robust enough to handle a moderate increase in oil prices and some fiscal slippage for subsidies would probably be tolerated.