Indian Govt. to Free Diesel Prices

Article published in the Hindu, April 24th, 2012

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The government on Tuesday said it has agreed in-principle to deregulate diesel prices, but is not considering similar proposal for the cooking gas.

“Government has, in principle, agreed to make the prices of diesel market determined,” Minister of State for Finance Namo Narain Meena said in a written reply to the Rajya Sabha.

While petrol prices are market-linked, the government fixes the rates of LPG, kerosene and diesel, which results in a large budgetary expenditure on subsidies.

“There is no proposal at present to fully deregulate cooking gas price,” Mr. Meena said.

He said the government continues to fix the price of diesel in order to shield the common man from the impact of rising crude oil prices and the resultant inflation.

“In order to insulate the common man from the impact of rise in international oil prices and the domestic inflationary conditions, the government continues to modulate the retail selling price of diesel,” Mr. Meena added.

Global crude oil prices have surged since the beginning of 2012 on account of geo-political concerns in the Middle East and abundant global liquidity. The price of Brent crude rose to USD 120 a barrel in mid-April from USD 111 in January.

For the current fiscal, the government has made a provision of Rs 43,580 crore for oil subsidies, of which Rs 40,000 crore has been earmarked as compensation to oil marketing companies (OMCs) for selling petroleum products at lower than market rates.

During the 2011-12 fiscal, the government has paid Rs 65,000 crore to OMCs on account of under-recoveries, of which Rs 20,000 crore alone was for the January-March quarter.

High subsidies are putting pressure on the country’s fiscal deficit, which touched 5.9 per cent of GDP last fiscal and is pegged at 5.1 per cent in 2012-13. India imports about 80 per cent of its crude oil requirement.

The government targets to bring down the subsidy bill to below 2 per cent of GDP this fiscal and 1.75 per cent in the subsequent years.