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Is it time to free up diesel prices?

HT takes a closer look at how freeing state-administered diesel prices can actually benefit the economy and commoners

business Updated: Sep 12, 2012 01:10 IST
Anupama Airy

Hindustan Times

takes a closer look at how freeing state-administered diesel prices can actually benefit the economy and commoners.





Why diesel prices must be freed?


It has never been an easy task to increase diesel prices in India. So strong are the political reverberations of any hike in diesel prices that the government has chosen to rather take a hit on its own finances by doling out huge subsidies than to bite the bullet. Once again the talk of increasing diesel prices is doing the rounds. While it remains to be seen how effectively the government can push its intent across the political parties, it is largely felt that the solution to this menace lies in completely deregulating or freeing diesel prices.


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What is government’s stand on diesel price revision?


The Empowered Group of Ministers (EGoM), in its meeting held on June 25, 2010, had decided in principle that the price of diesel will be made market determined, both at the refinery gate and at retail level. However, no headway has been made so far and the government continues to modulate the prices of diesel.

How often do the oil companies revise diesel prices?
While prices of petrol have been freed, diesel prices are still governed by the government. In the past two years, the government has increased diesel prices only twice — on June 26, 2010 (by Rs. 2 a litre) and on June 25, 2011 (by Rs. 3 a litre).

Why do we need to increase diesel prices?
The international crude oil prices have been consistently increasing and have stayed above $100 a barrel for many months now. The sustained rise in the international prices has led to further increase in the losses or under-recoveries of oil marketing companies on diesel. Currently, oil companies are incurring under-recovery of Rs. 19 a litre on diesel. Non-revision in diesel prices put a direct strain on government’s finances as huge subsidy dole outs are made out every year to state-owned oil firms to compensate for these losses.

Why is the difference of petrol and diesel prices growing?
With more frequent price revisions in petrol by oil companies since its deregulation in June 2010, the gap between the retail price of petrol (Rs. 68.46 a litre) and diesel (Rs. 41.32 a litre) has increased to Rs. 27.14 a litre (at Delhi).

What are the implications of the wide gap in petrol and diesel prices?
The gap of about Rs. 27 a litre is encouraging increased usage of subsidised diesel over petrol.

Who is being benefited from this trend?
With diesel being much cheaper than petrol, there has been a big surge in the sales of diesel vehicles, with end beneficiaries being the well-to-do class that buy four wheelers, especially diesel run SUVs. The low diesel price has also encouraged industrial customers to use diesel as fuel instead of furnace oil or industrial fuel.

How does increase in diesel prices impacts inflation?
Any increase in diesel price has a cascading effect on the inflation. Diesel has a weightage of 4.67 in the Whole Sale Price Index (WPI), which is highest among the 670 commodities of WPI Index. For each rupee increase in diesel price, the WPI index is estimated to increase by 0.13%.

What are subsidies and who bears it?

Public sector oil companies are compensated by the government for their losses or under-recoveries on selling fuel below the cost price in the domestic market in the form of cash assistance or subsidy.http://www.hindustantimes.com/Images/Popup/2012/9/12-09-12-BIZ-06.jpg



In addition to the government’s subsidy package, upstream oil companies such as ONGC, OIL and GAIL compensate the sister oil refining companies by way of discounts on sale of crude oil and gas. The final compensation or the bailout package includes these discounts from the upstream oil companies besides release of funds by the finance ministry towards meeting these under-recoveries on sale of subsidised fuels.



What will happen if diesel prices are hiked periodically?

Regular revisions in diesel prices will reduce government’s subsidy bill and help in containing the burgeoning fiscal deficit, that is the top most priority of the government.



Why is the government reluctant to increase prices?

Political pressures and fear of vote banks lead to these delays. Every time the price of diesel has been increased, there have been public and political protests from within the ruling coalition partners and the opposition parties. These pressures lead to delays in policy reforms to adjust fuel prices periodically.

How will diesel price hike help the economy?
With under-recoveries in diesel close to Rs. 19 a litre, a Rs. 1 increase in diesel price would result in a subsidy reduction of about Rs. 7,800 crore. If diesel prices are not adjusted periodically, it will amount to larger subsidies by the government. Large subsidy provisions would be a great strain on the fiscal system and would also have significant adverse impact on inflation.