Retail prices of petrol and diesel may come down by up to Rs 10 and Rs 3-Rs 4 per litre respectively. This will have a positive impact on the economy — lower inflation, lower interest rates and increased consumer demand.
A note forwarded by the ministry of petroleum and natural gas to the Planning Commission and the ministry of finance, a copy of which is with HT, proposes to free the pricing of petrol and diesel from government control.
International crude oil prices, which are ruling at four-year lows (of about $40 a barrel), will make it possible for domestic oil marketing companies (OMCs) to effect such large cuts in retail prices. The official announcement is expected shortly before the Lok Sabha polls are notified.
Further, a cut of Rs 25 per cylinder of cooking gas (LPG) is on the anvil, though LPG and kerosene will continue to be subsidised.
“Pricing of petrol and diesel may be de-controlled,” the note says. “OMCs may price the two products on trade parity basis in tandem with international oil prices. Under-recoveries on PDS kerosene and domestic LPG to be met through oil bonds.”
Such cuts in retail fuel prices will result in a dramatic drop in the wholesale price index-based inflation rate, which is currently ruling at 5.6 per cent.
This will give the Reserve Bank of India (RBI) sufficient headroom to cut the repo rate (the rate at which it lends short-term money to banks) and the reverse repo rate (the rate at which the RBI borrows short-term money from banks). These are currently at 5.5 per cent and 4 per cent, respectively.
Since lending and deposit rates are linked to these two rates, any significant fall in the repo and reverse repo rates will put pressure on commercial banks to lower lending rates on home and other loans. This will provide a fillip to consumption demand and help kick-start the faltering economy.
The administered price mechanism, under which the government fixed the retail prices of fuels, was officially dismantled in April 2002. There was a proposal then to revise retail prices at regular 15-day intervals. This practice, however, was discontinued after a few months.