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Diesel Price Hike and Deregulation by Government of India

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Fuel Price Hike

The first expert committee for the de-regulation of diesel was set up by the government over 15 years ago. It is now after a decade and half that the government has taken the steps towards the deregulation of the fuel. It is quite understood that the government is bound to control the price of the fuel, as majority of the population of the country is not privileged enough to afford fuel price hike. Given that a substantial part of India’s population is still struggling to actually stay afloat, price hike in case of the most widely used fuel in the country would have made life impossible for these people.

On the other hand, if we talk about the rising fiscal deficit and the subsidy provided by the government, every nook and corner of the country is being eaten up; and the country is being deprived of the growth, the economy is expected to achieve. These huge subsidies are threat to cripple some of the oil companies which provides diesel, petrol and cooking gas across every part of the country.

Diesel Price

If we talk of Diesel, it accounts for over 66% of the annual fuel loss which is over Rs 1.6 Lakh Crore. Companies such as IOC, HPCL and BPCL are hard pressed to invest in improving retail infrastructure, so that the amount of subsidy which is being given by these companies could be managed well with the help of revenue generated from these facilities. It is needless to say that the government decision to deregulate diesel prices would marginally increase the monthly inflation in the short-run, but talking of the long run it will help the country control its ever rising fiscal deficit which is a sign of danger for the economy. There will a spike seen in inflation to the tune of 6-7 basis points but the effect will be observed for a shorter duration and would be a short-run phenomenon. This negative effect of rising inflation will eventually translate into lower fiscal deficit so as to attain the revised target of 5.3% of the GDP. The deregulation of diesel would definitely open the opportunities towards other utility fuels like LPG and kerosene, where a reduction in subsidy could be possible.

Read more about Advantages and Disadvantages of Oil.

It is expected that the Indian economy will be successful in restructuring its fiscal deficit at 5.3% of the GDP in the current fiscal year. This will be achieved with the help of proceeds generated from the divestment and spectrum sale to the telecom companies.

Industry voice, FICCI recently said that the decision to authorize oil marketing companies to hike diesel prices by a marginal amount, varying from 50 paise per liter per month is a much needed step as this will help in reducing the annual loss due to the retailing of fuel.

Effects of Diesel Price Control

With the controlling of price of diesel going in the hands of oil companies, the diesel price hike will result in the increase in the freight rate. Use of diesel in running electricity generators will be reduced significantly, which will result in increased electricity bills for factories and residential communities.

Read more about Oil & Gas companies in India.

Regarding the hike of diesel price, the Vijay Kelkar Committee had suggested a clear roadmap of hiking prices by Re 1 a liter every month till the entire under-recovery on diesel, currently Rs 9.6, is eliminated. Where as on the other hand government has “authorized” the OMCs to decide how much and when to increase. Such a step of authorizing the OMCs to increase the price of diesel every month for small consumers and collectively for bulk consumers like Railways and State Transport will only add to the financial woes of the companies. The dual pricing system will only worsen uncertainties for consumers.

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Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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