India and Malaysia Risk Voters’ Wrath by Raising Fuel Prices

nytimes.com

By THOMAS FULLER and HEATHER TIMMONS

Published: June 5, 2008

 

BANGKOK — With no end in sight to high world oil prices, India and Malaysia on Wednesday became the latest Asian countries to risk the wrath of voters by raising the price of subsidized fuel, a highly unpopular measure that could further weaken the governments of both countries made fragile by recent electoral setbacks.

The moves follow similar price increases in Indonesia, Pakistan and Sri Lanka and are recognition by governments that they can no longer shelter their populations from the spike in energy prices.

In India the increase was quickly condemned by political parties from all sides: the Communist Party promised a week of demonstrations, including blockades of roads and trains that were due to start Wednesday, while the conservative Bharatiya Janata Party said its members would also take to the streets. Raising fuel prices was the equivalent of “economic terrorism,” said Rajiv Pratap Rudy, a B.J.P. spokesman, who added that the move would drive the “last nail in the coffin for the common man.”

Among economists and policy makers, the decision was described as painful but necessary. Fuel subsidies in Malaysia alone would have amounted to $17 billion this year, four times more than the combined amount the government pays for national defense, education and health care.

Malaysia is raising gasoline prices by 40 percent and plans on further increases in the future, according to Shahrir Abdul Samad, the domestic trade and consumer affairs minister.

Gasoline prices vary across India, but the announcement Wednesday amounted to an increase of around 10 percent for gasoline and diesel.

Consumers will pay about 50 rupees a liter for gasoline, or about $4.45 a gallon, well above the average $3.79 a gallon average that drivers in the United States are paying, according to the most recent figures from the Department of Energy.

The fuel price increase is expected to drive inflation up in India from 8.1 percent to as high as 10 percent, when knock-on effects are felt in manufacturing and other industries.

Chandra Prakash, a gas-pump repairman in Delhi, said that because of the price increases, he might be forced to abandon his scooter altogether and start walking from job to job. Already, he said, he is barely surviving. “It is difficult to cut back expenses anymore,” he said, adding that it was the government’s job to “keep prices in check.”

The Indian minister of petroleum, Murli Deora, said Tuesday that the price increases were an “absolute necessity” due to the increase in world oil prices. But the price increase could further weaken the Congress Party government, which has been losing ground in state elections in recent months. Most recently, the state of Karnataka voted for the B.J.P. in May.

In Malaysia, the governing coalition of Prime Minister Abdullah Ahmad Badawi was weakened after losing in 5 of the country’s 13 states in March elections, and Abdullah has been pressured by some senior members of his party to step down. Yet if he can hold his coalition together, cutting subsidies may benefit Abdullah and his allies in the long run.

“They will have a lot more cash to play with,” said Ibrahim Suffian, director of the Merdeka Center, an independent polling agency. The government will able to use the savings for social programs and infrastructure, moves that would please both voters and members of the governing party, the United Malays National Organization, which has been able to remain united in the past by doling out contracts.

To cushion the blow for consumers, the Malaysian government plans to offer a yearly cash rebate to owners of small cars and motorcycles. Cars with engines smaller than two liters will receive an annual payout of $200. Motorcycle owners will be given about one-fifth that amount, according to the Malaysian news Web site, Malaysiakini.

Anwar Ibrahim, the head of the largest opposition party and a former finance minister, said he feared that the billions of dollars the government will save by cutting subsidies would be wasted.

In the past, he said, Malaysia’s oil revenues were “disbursed for megaprojects and projects that benefit the rich and the cronies.”

“People can be persuaded to accept the gradual reduction of subsidies,” he said by telephone from his home in Kuala Lumpur. “But not when the funds are not disbursed in a transparent manner.”

Gas costs about $2.20 a gallon in Malaysia, among the cheapest prices in Asia. The government in recent days has sought to clamp down on drivers from neighboring Thailand and Singapore from crossing the border to fill their tanks. Late Wednesday, after the measure was announced, long lines could be seen forming at gas stations around Kuala Lumpur as drivers tried to beat the midnight deadline for the new prices.

Removing subsidies is likely to hit some Malaysians hard because the price of transport, food and electricity are all expected to rise. Malaysia relies heavily on subsidized natural gas to generate electricity.

Prime Minister Abdullah said the price increases would propel the country’s inflation rate to as high as 5 percent this year, from just 2 percent last year.

The national oil company, Petronas, has subsidized the natural gas at a cumulative loss since 1997 of more than $19 billion. Much of the gas was from Malaysian offshore wells, but some was bought from Vietnam and Indonesia at market prices and then sold locally for one-quarter of that price, according to Hassan Marican, president and chief executive of Petronas.

Malaysia has been a net exporter of oil in recent decades and more than one- third of the government’s budget is derived from oil revenues but the country’s demand for energy will outstrip its supply as soon as two years from now, according to Petronas calculations.

The removal of subsidies may reduce Malaysia’s demand for energy and thus extend its reserves. Globally, the scaling back of subsidies in Malaysia, Indonesia, Sri Lanka, Pakistan and a handful of other developing countries is too small to have a significant impact on world prices, Goldman Sachs, the investment bank, said in a report released Monday. The report did not take into account the price increase in India.

Thomas Fuller reported from Bangkok and Heather Timmons from New Delhi. Hari Kumar contributed reporting from New Delhi.