The Modi government unveiled its biggest reform so far on Saturday, aligning diesel prices with international crude oil costs, a move that will make the key fuel cheaper by Rs 3.37 a litre and help control inflation.
The bold decision was aided by a fall in global oil prices to near four-year lows, making for the first domestic diesel price cut since January 2009.
Diesel is the fuel most used in the road transport of goods across the length and breadth of India. Ideally, lower freight costs would push food prices down, creating the space for the Reserve Bank of India (RBI) to cut interest rates, making home loans cheaper and sparking an economic revival.
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“Henceforth, like petrol, pricing of diesel will be market determined,” Finance minister Arun Jaitley said after a cabinet meeting. Like petrol, diesel prices will change every fortnight.
The government also decided to re-launch the direct benefit transfer scheme for cooking gas and link it with the new bank accounts opened under the Pradhan Mantri Jan Dhan Yojana.
Jaitley said that the programme would be implemented “in a mission mode” between November 10 and January 1, 2015 and that those who lacked bank accounts would continue to receive subsidised LPG gas cylinders.
In Delhi price of diesel expected to go down by Rs. 3.37 effective midnight tonight: Arun Jaitley pic.twitter.com/BxtxZQ7iZh— ANI (@ANI_news) October 18, 2014
“Hon’ble PM launched bigticket reforms today;lucky that major reforms began with PNG sector;interest of poor & common men was central in them,” Dharmendra Pradhan, Petroleum minister, tweeted.
Diesel prices were raised by 50 paisa on September 1 and cumulatively risen by Rs 11.81 per litre in 19 instalments since January 2013.
A cut in these prices leads to a lower subsidy bill and will eventually help the government cut taxes on petro products. This, in turn, will help cushion the shocks when global crude prices rise. India imports two-thirds of its energy needs.
Inflation is already falling. Wholesale inflation rate plunged to 2.38% in September, the lowest in five years, while retail inflation fell to 6.46%, the lowest since 2012, aided by a sharp drop in vegetable and petrol prices.
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Market-determined diesel prices could also prompt more companies to take up fuel retailing. It will also help contain the fiscal deficit --— a measure of the amount the government borrows to fund its expenses—at the budgeted level of 4.1% of GDP in 2014-15.
RBI Governor Raghuram Rajan recently called on the government to “seize this moment”, while inflation is the lowest in five years and refiners are selling at a profit for the first time ever.
“This was long overdue," said Chandrajit Banerjee, director general of the Confederation of Indian Industry.
Petrol and diesel prices were first deregulated in April 2002 when the AB Vajpayee-led NDA government was in power. State price controls, however, made a back-door entry in 2004 when global crude prices started inching up.In June 2010 the UPA government freed petrol prices and in January 2013 the UPA government decided to deregulate diesel prices in a staggered manner by raising its prices by 50 paise a litre.