Sound economic reason and political sense have dictated the government's decision Friday to decontrol petrol price and hike that of other fuels, say experts.
In a long overdue policy reform in the energy sector, the government freed petrol from administrative control and hiked the prices of diesel, kerosene and cooking gas to help oil exploring and marketing companies which are losing revenues by selling fuels at discounted rates.
The government has taken advantage of the lower international crude prices. Currently, retail prices of auto fuels are pegged at crude price of $65-70 per barrel. Experts say oil prices are not expected to rise for the time being due to high crude oil inventories.
It will also take the pressure off the government's subsidy burden and cut its fiscal deficit, bringing it closer to the target of achieving a deficit of 5.5 percent for 2010-11 and 4 percent in the next fiscal.
Also, money spent on oil subsidies can now be diverted to other social sector programmes.
The government's chief economic advisor, Kaushik Basu, said the move will help the country become an efficient user of energy and help bring down prices in the long-run.
"It will rationalize the way we spend money, the kinds and amount of energy we use, and the cars we manufacture. It is an important step in making India a more efficient, global player," Basu said.
Energy experts said that by decontrolling petrol, the government has sent the right signal to the consumers to use the scarce resource carefully.
The immediate impact of the decision is likely to stoke inflation. But Basu said it will help in lowering prices.
"Though the immediate impact of this policy will be to increase inflation, in six to nine months we will have lower prices than what would have happened in the absence of this much-needed reform."
India's annual inflation touched double digits at 10.16 percent in May, rising from 9.59 percent in April.
He said the policy change was a much needed reform and would help in reducing the fiscal and revenue deficit of the government.
"To describe the government's decision to deregulate petroleum and diesel as an act of raising prices is to get it completely wrong. It is one of the most major reforms of recent times and should have beneficial effects on the entire economy," said Basu.
Industry experts said the government move is also a "game changer" in the oil sector as it is expected to help private companies like Reliance Industries and Essar, who had shut down their oil retailing outlets given the price difference between their selling price and that of state-run oil marketing companies.
Politically, the government has chosen an opportune time in undertaking the reform as only one state election in Bihar is due in this fiscal year.
Reforms would be difficult to implement later as there would be at least five state elections after fiscal 2011, including that of West Bengal and Tamil Nadu where the Trinamool Congress and the Dravida Munethra Kazhagam, respectively, have vital stakes.