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Paranjoy Guha Thakurta

Decontrolling Diesel: Hidden Risks

Date published: October 25, 2014Publication: Goan, The Link to original article

As had been anticipated, on October 18, the Cabinet Committee of Economic Affairs chaired by Prime Minister Narendra Modi decided to decontrol the prices of diesel, the most widely-used petroleum product in the country. Riding on an unexpected fall in world prices of crude oil, the government was able to simultaneously announce a sharp fall in consumer prices of diesel by Rs 3.37 per litre (in Delhi). But the decision to take the price of diesel outside the administrative control of the government is fraught with risk and uncertainty. If and when international prices of diesel go up -- as they inevitably will, hopefully later not sooner -- domestic prices would rise automatically thereby contributing to food inflation.

The price of diesel has been brought down for the first time since late-January 2009 when it was reduced by Rs 2 a litre to a little under Rs 31. Thereafter, the price of diesel climbed up to nearly Rs 59 per litre till September in small doses, usually 40-50 paise per litre. The price of diesel went up at least 19 times from January 2013 onwards. Its price is currently Rs 58.97 a litre in Delhi. After deregulation, subsidy will no longer be provided on sales of diesel and this will reduce the expenditure outgo of the government by roughly Rs 10,000 crore during the current financial year. The government has claimed that market determination of diesel prices will "facilitate greater competition in the auto fuels retail segment and (lead to) enhanced efficiency in service delivery of the oil companies" which would "benefit consumers due to greater competition among oil companies and more choices".

India currently imports roughly 80 per cent of the country's total requirement of crude oil. The fall in world oil prices is great news for Finance Minister Arun Jaitley who had reportedly assumed in his budget that oil prices would be in the region of $110 a barrel against around $80 at present. Oil imports account for approximately a third of total imports. Petrol and diesel prices were deregulated in April 2002 when the National Democratic Alliance government led by Atal Behari Vajpayee was in power. However, the price of diesel was again administered by the government after the United Progressive Alliance government came to power in 2004 and Mani Shankar Aiyar took charge of the petroleum ministry.

Diesel is the most used petroleum product for fuelling agricultural pump-sets and for the transportation industry, both of which have a direct impact on food prices. Diesel is the largest selling petroleum product in India in terms of tonnage as well as value, accounting for 55-60 per cent of the total value and volume of all petroleum products sold. While petrol is largely consumed by the affluent sections, many two-wheelers used by the middle classes also use petrol. Petrol prices were decontrolled in 2010 by the second UPA government. The cut in diesel prices will surely cool inflationary expectations. A fall in the inflation rate will enable the Reserve Bank of India to reduce interest rates. Only two major petroleum products would henceforth be subsidised: kerosene and cooking gas.

Deregulation of the price of diesel will facilitate private companies such as Reliance Industries and Essar Oil to reopen their retail outlets. Such companies did not receive government support for selling diesel at discounted rates and would sell via state-owned refiners despite having their own sales infrastructure. In 2008, Reliance decided to shut down all the 1,400-odd retail outlets for petroleum products (owned directly by it or through franchisees and/or associates) as international prices of crude oil had surged. Before it shut down its retail outlets, the price of diesel sold at Reliance outlets used to be a hefty Rs 14 per litre higher than the prices charged at outlets of public sector companies like Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum.

Having outlined the positive implications of decontrolling the price of diesel, it is important to look at the likely negative aspects of the decision. As one has stated before, the government should be clear about the real and present dangers that would have to be confronted if oil prices flare up in the future. If that happens, it will not be possible for the government to control food inflation.

In the recent past, international oil prices have been extremely volatile and unpredictable. During 2008, crude oil prices jumped from $40 a barrel to $147 a barrel before collapsing again to $40 a barrel. Through 2009 and 2010, prices rose steadily to around $90 a barrel before spiking to a 30-month high of $120 a barrel in February 2011, after the so-called Arab Spring began. No one can predict the price of oil. Many have been surprised by the recent dip in international prices of crude oil.

Crude prices had touched US$115 a barrel in the third week of June, the highest in nine months, but thereafter prices have come tumbling down and are currently ruling at around $80-85 a barrel, the lowest in four years. One of the reasons for the decline in crude oil prices is the sharp rise in the availability of shale gas in the United States. The other reason is that the world economy is yet to revive and low demand for petroleum products in Europe and elsewhere has contributed to the fall in prices. And that is not good news for India, especially its exporters.

The government hopes that this will not just be a case of "beginner's luck" and that there will not be any nasty surprises in the offing in the foreseeable future.

Date posted: September 1, 2015Last modified: September 1, 2015Posted byEeshaan Tiwary
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