Thursday, January 31, 2013


Deregulation of diesel price would reduce irrational subsidies!

Finally, after series of flawed policies, I saw some sensible and path-breaking policies being announced by our incumbent government. After rounds of debates and discussions, the government finally took the ‘obvious and long-awaited’ decision of deregulating the diesel prices across the nation! This one policy that should have been implemented a way back, came at the time when the nation is facing an economic turbulence and the ruling government is fighting for its survival! Keeping everything at bay, deregulating diesel price would solve multiple problems and in all probability, would provide an impetus to the economy as well.

Now that diesel price is being deregulated, the staterun oil marketing companies can decide diesel prices in sync with global crude oil prices. The oil company would no more have to sell diesel at lower price than required or a price that spelled losses for the economy at large. This would not only reduce the gap between petrol and diesel prices but would save crores by sidelining the huge subsidy (worth Rs 95,000 crore per year) that is currently being allocated for keeping the diesel prices low! A back of envelope calculation shows that a one unit price hike in diesel price would save 4,000 units of subsidy. This further will help the government to reduce the fiscal deficit and maintain a judicious fiscal deficit to GDP ratio! As per a study by CARE research, “Every rupee hike in diesel price trims under-recoveries by approximately Rs 80 billion annually... An overall diesel price hike of Rs 5/litre by the end of FY14 along with currency appreciation is expected to reduce losses on sale of diesel to an average of Rs 5/litre for FY14 compared to current losses of Rs 9.6/ litre.” Furthermore, deregulation of price would eventually reduce hoarding and black marketing of diesel. I still remember the beelines at fuel station hours prior to the fuel price hikes and also the ‘no-availability’ status of fuel the very next day – a clear case of fuel hoarding! Given the price gap between diesel and petrol price, subsidised diesel is mostly redirected to affluent than needy.

This move will finally bring back the private players in the arena. Reliance Industries, Shell and Essar Oil which had to shutter down their fuel station a couple of years back, would now be back in business. Now both the government owned pumps and private players would try to woo their customers with other freebies as diesel would be sold at same price by both these entities. However, the government needs to chalk out clear plans of reimbursing the premium from farmers and other allied sectors. No doubt, this would definitely increase the input costs for the farmer, but just like LPG cylinders, these pockets of population can be issued a limited supply of subsidised fuel through privately owned authorised outlets!

In order to cushion the customers from sudden price hike, the policy makers can either adjust the tax structure in order to keep the price within a stipulated band or can offer subsidy to the players (both public and private) whenever global crude oil prices reaches a limit that is beyond the affordability of the end consumers. All in all, finally the taxpayers money would not channelized to SUV (Sport Utility Vehicle) owners and shopping malls in form of subsidy. The money now could be used as funds for refurbishing the agriculture sectors and providing them with greener and cheaper modes of energy. And finally for all the naysayers, just like LPG price deregulation (and subsidy removal) did make the entire process transparent, diesel price would make the entire oil cartel transparent!


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