Government has deregulated diesel price. In simple terms, the government will no longer decide the selling price of diesel. That decision will now be taken by oil retailers.
Deregulating the price of diesel means that the price of diesel would now be linked to market price, instead of the government subsidizing the same as earlier. If the international prices increase, the price of diesel would also increase and if international prices reduce, the price of diesel would also reduce.
Let us understand with a hypothetical example. If the market price was Rs 100, the government determined a fixed rate and allowed diesel to be sold at Rs 60. Thus, the government bore the extra loss of Rs 40 on the product, which is also called subsidy. Diesel deregulation would now mean the government’s subsidy burden would be reduced, thus freeing-up large amounts of money for social welfare and developmental activities.
What was the situation earlier?
Why were petrol and diesel not deregulated simultaneously? If we trace the timeline, based on the recommendations of Kirith Parikh Committee, market determined pricing of petrol was adopted in 2010. The committee had also recommended that the government should move towards making the price of diesel market determined. Subsequently, the government introduced partial deregulation of diesel price, allowing a hike of 50 paise/ litre per month for retail customers and nearly Rs. 11 for bulk consumers. Bulk consumers here include railways, defence etc. Thus, dual pricing of diesel was introduced, where non-farm use of diesel had minimum subsidy. The policy did not work as there was diversion, bribery. The way ahead was to do away with dual pricing, and transit to decontrol diesel. The staggered diesel price hike initiated since January 2013 and the recent decline in the prices of crude in the global market converted the under-recovery of public sector oil marketing companies into an over-recovery. Under-recovery is the gap between desired price and administered price. Apart from the actual cost, desired price includes many other elements like cost & freight charges, import and custom duties etc. which just inflate desired price and, in turn, produce under-recovery.
Now that we finally have ‘acche din’, the bold decision was taken and it comes in the wake of a sharp drop in international prices of crude.
What are the possible implications of this decision?
- Overall revenue of the government would increase. This will help in controlling the fiscal deficit. The government can spend this extra revenue for social welfare and developmental activities. This will also ease the pressure on finance ministry during budgetary allocation of funds to the various sectors.
- Diesel price in New Delhi came down due to persistent softening of global crude oil prices. The Indian crude oil basket fell below $90 per barrel due to a decline in demand on the back of concerns over global economic recovery. It will also be advantageous for the consumers as they will now pay market rates for the fuel which is lower by more than Rs. 3. However, we will have to be watchful of global developments. Crude prices are currently low because of low demand and appreciation of the US dollar in relation to its trading partners. In a scenario where even if the demand and supply of global oil and petroleum products remain the same, depreciation of the US dollar may flare up both crude and product prices.
- This decision will leave more money with upstream companies like ONGC for investment in the exploration and production sector, thereby enhancing our efforts for energy security for the country.
- The private companies can foray into the retail fuel sale market and earn profits. The competition from the state run fuel pumps would crop up and there are chances that the private companies may sell the fuel at lesser prices than the government companies. There can be a revolution just similar to the one in the telecom market.
- Diesel deregulation will also bring the retail network of private oil marketing companies into the system. This will increase competition, enhance efficiency and service delivery, thus benefiting the end consumer. Now private sector oil companies such as Reliance and Essar Oil can reopen all their diesel filling stations. These companies have been operating a handful of their diesel filling stations because of over-recovery in diesel prices in the past two months following the fall in international crude prices.
- Diesel has a 4.67 per cent weight on the wholesale price index (WPI). The direct impact of lowered diesel prices would be significant on WPI but negligible on the consumer price index (CPI) inflation. It would help to create more space for the RBI to cut policy rates. If there is an increase in the fuel prices, it would increase the prices of all essential commodities and food items in India, eventually increasing the inflation.
- Diesel deregulation will have a positive impact on banking stocks as it will help in reigning inflation and bring down interest rates substantially lower. It will result in an improved liquidity situation that will bring down the cost of funds for the system and improve credit demand.
- States are apprehensive that they would lose a large amount of revenue in value-added tax. Farming sector, which consumes a lot of diesel might face the brunt when the prices increase globally or the value of rupee declines against dollar.
As a side note, the highest consumption is by the transport sector, accounting for 70 per cent of the total diesel sales. About 13 per cent of the total consumption is accounted for by the agricultural sector
