July 5 (Reuters) – Many flights were cancelled, schools shut and businesses disrupted across India on Monday because of a strike over fuel price rises that tests the government’s efforts to cut subsidies and trim a budget deficit.

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India has moved to ease price controls on gasoline and raised other fuel rates, and Prime Minister Manmohan Singh signalled his resolve to push bold reforms with intentions to free up diesel prices at a later date. [ID:nSGE65T028]

Here are some questions and answers about the implications of the fuel price rises.

WHAT WILL BE THE POLITICAL IMPACT?

Opposition parties will likely try to block legislation in the next parliament session by seeking support from the ruling Congress party’s coalition allies.

Congress could be hit in state elections, including West Bengal and Tamil Nadu, in early 2011. But the rises come months before the votes and voter backlash can be mitigated by using savings from fuel price deregulation to boost social spending.

There is also an escape clause. The government has already said it would intervene if crude prices rise sharply. What sharply means is unclear and it could be used politically to justify a new increase in subsidies.

The protests are seen as a test of the opposition’s mettle, having struggled to find its feet after electoral defeat last year. The strike call has drawn a mixed response, with parts of opposition-controlled states at a near standstill amid violent protests while other areas remained relatively untouched.

WHAT WILL BE THE IMPACT ON INDIA’S RETAIL OIL MARKET? State firms such as Indian Oil Corp (IOC.BO), Bharat Petroleum Corp Ltd (BPCL.BO) and Hindustan Petroleum Corp Ltd (HPCL.BO), which control more than 95 percent of about 40,000 refined fuel pumps in India, are likely to lose market share.

Reliance Industries Ltd. (RELI.BO), which operates the world’s biggest refining complex at Jamnagar, is expected to revive all its pumps, which were shut down five years ago when the government started subsidising fuel sold by state firms. Essar Oil (ESRO.BO) is also expanding its retail network.

HOW SOON WILL PRIVATE FIRMS EXPAND RETAIL NETWORKS?

The government has only freed the price of gasoline, which accounts for about 10 percent of oil products sold. The government has said it will also free up diesel, used by trucks, buses and a growing number of cars, and which accounts for more than a third of the oil consumed. Private firms will speed up retail expansion once price controls on diesel are removed.

Essar has said it plans to increase its retail network to 1,700 by end-March from 1,342.

WHAT IS THE EXTENT OF THE PRICE RISE?

Domestic fuels are taxed differently by the states. In New Delhi, gasoline prices were raised by 7.3 percent, diesel by 5.2 percent, kerosene by 32.5 percent and LPG by 11.3 percent.

HOW WILL GASOLINE PRICES BE SET?

Companies will fix their own prices. This could see more competition in the retail sector and eventually push down prices.

HOW WILL IT IMPACT EXPORTS OF OIL PRODUCTS?

Exports may fall. As Reliance increases domestic sales, it may reduce exports from its 660,000 bpd plant to sell to the domestic market, which is usually more lucrative.

HOW DOES IT IMPACT THE FINANCES OF OIL FIRMS?

State firms will gain from market rates of gasoline and higher prices of diesel. Before the price rises, state-run retailers were expecting a revenue loss of $24.4 billion this year, based on an average crude price of $85 a barrel.

WILL ISSUANCES AFFECT THE BOND MARKETS?

No. Oil companies issue bonds to borrow money from the corporate bond market largely to finance a shortfall in working capital on selling fuel below cost. However, dealers have said that bond issuances by oil companies will now come down because they will have more cash in their books after the move to raise domestic fuel prices.

WILL INFLATION STAY AT ELEVATED LEVELS?

Yes. That is very likely. The Finance Ministry’s chief economic adviser, Kaushik Basu, said the price rises would impact headline inflation by 0.9 percentage points.

Analysts have also estimated that the price increases may lead to a rise in headline inflation of more than 100 basis points with a lag of a few weeks. A senior government official said June headline inflation could even touch 11 percent.

But forecasts from the Indian Meteorological Department suggest that rains this year are expected to be normal, which should bring down food prices and inflation. The central bank expects headline inflation to ease to 5.5 percent by the end of this financial year.

HOW DOES IT IMPACT RATE EXPECTATIONS IN THE MARKETS?

The fuel price rise will likely aggravate existing double digit inflationary pressure, which already prompted the central bank to a surprise 25 basis points rise on Friday citing worries over prices of fuel and manufactured goods. [ID:nSGE6610I8]

Markets are expecting another rate rise in a July 27 policy review, of at least 25 basis points. However, Finance Minister Pranab Mukherjee may have clouded predictions of the bank’s next step, saying the latest rise could be “subsumed” at the review. [ID:nSGE66302C]

TO WHAT EXTENT WILL THE FISCAL DEFICIT COME DOWN?

With windfall gains from the sale of telecom spectrum and a lower fuel subsidy bill the government expects the fiscal deficit this financial year to ease to about 4.5 percent of gross domestic product from 6.7 percent.