DIESEL DEREGULATION : A NEW WAVE OF ECONOMIC REFORM


The government on Saturday deregulated diesel prices. In simple terms, the government will no longer decide the selling price of diesel in the country. That decision will now be taken by oil retailers such as Indian Oil Corp, BPCL and HPCL.

diesel

The move also eases the government’s huge subsidy burden paid out of the budget. In the first quarter of this fiscal (April-June 2014), the under-recovery burden on oil marketing companies was Rs 9,037 crore which would have required a sharing mechanism between the budget, consumers, OMCs and upstream oil and gas companies.

Petrol and diesel prices were deregulated in April 2002 when the NDA government led by Atal Bihari Vajpayee was in power. But administered pricing regime made a back-door entry in 2004 with UPA Petroleum Minister Mani Shankar Aiyar pushing for control on diesel, LPG and kerosene prices.

What Does Deregulation of Diesel Mean?

Deregulation involves removing government legislation and laws in a particular market. Deregulation often refers to removing barriers to competition. Hence,deregulation of diesel means that diesel prices will now be market-linked. That means if global crude prices rise, customers will have to pay more for buying diesel and vice versa.

Immediate Impact

Diesel prices were cut by a sharp Rs. 3.37 per litre today because global crude prices have fallen to a four-year low below $90 per dollar. Oil retailers have been making a profit on selling diesel since September 16.

The cut in diesel prices today will lead to a further cool off in inflation. That’s because diesel is the most used fuel product in the agriculture sector and the transportation industry, both of which have a direct bearing on food prices. Lower inflation will improve purchasing capacity of common people.

A further fall in inflation will pressure the Reserve Bank to cut rates. That will further boost demand in the economy.

Future Expectations

  • The government’s subsidy bill will come down as it will no longer have to reimburse oil companies for selling diesel at below-market price. Last year (2013-14), the government had to pay Rs. 85,000 crore for selling diesel, LPG and kerosene at below-market prices. This year the subsidy burden was estimated much lower at around Rs. 63,000 crore.
  • The freeing up of diesel prices and the sharp fall in global crude prices is expected to further save the government over Rs. 10,000 crore in subsidy payment this year, analysts say. Lower subsidy means the government may be able to meet its fiscal deficit target of 4.1 per cent of GDP. This will be a big positive for the Indian economy.
  • India imports over 75 per cent of its domestic oil requirements. Oil is the biggest component of the import bill. Falling crude prices will lead to a reduction in import bill and will have a positive impact on rupee.
  • Diesel sales account for about 55 per cent of overall sales of oil marketing companies. Till now, these companies had to pay part of the subsidy on selling diesel at below-market price to the government. Saturday’s move will ensure that these companies will not have to shell out money for diesel subsidy. Their profitability will go up and so expect shares in IOC, BPCL and HPCL as well as upstream oil companies such as ONGC to jump on Monday.
  • Deregulation is also expected to bring private firms such as Reliance Industries and Essar Oil into retail sale. Such companies do not receive government support for selling diesel at discounted rates and currently sell via state refiners, despite having their own sales infrastructure.

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