The diesel price hike will hurt in the current slowdown; but it is a correction that has been long overdue.

The Rs 5-per-litre hike in diesel price announced on Thursday is steep, but unavoidable. Having not raised prices at all since June 2011, a sharp increase is, in a sense, the ‘price’ that consumers are paying for the sins of indecision on the Government’s part. In this case, the combined losses of over Rs 40,500 crore reported by the public sector oil marketing companies (OMC) for the quarter ended June alone – not to speak of its own perilous finances — left the Government with no alternative. That apart, there was also the issue of the differential between petrol and diesel prices more than doubling to Rs 27-28 a litre in the last five years. This has produced the worst kind of distortions: An estimated 16 per cent of the diesel consumed in India last year went to fuel passenger cars and SUVs, even as less well-off users of two-wheelers or auto-rickshaws have been subjected to repeated petrol price increases.

The above concerns have been partly addressed by the latest diesel price hike, alongside no increase for petrol in return for the OMCs being granted an excise duty reduction of Rs 5.30. That would bring down the price gap between the two fuels, though it still remains disconcertingly wide. Moreover, of the Rs 5 diesel price increase, only Rs 3.5 will accrue to the OMCs, with the Government pocketing the remaining to recoup what it would forego by way of lower excise from petrol. At the end of it, the OMCs would still be selling diesel about Rs 13.5 a litre cheaper than the realisable market-parity rate. It will take many more rounds of price increases — or a sharp fall in global crude prices — to plug the under-recoveries in diesel. The good news is that these have been almost plugged now for petrol and the Government has taken a huge step in reducing under-recoveries in LPG as well, by limiting the number of subsidised cylinders to six annually.

One hopes the Government summons the necessary political courage to stick to its latest decisions and also go in for calibrated price increases for diesel in future, which would be easier for the economy to absorb. Such capacity may be quite limited in the current recessionary environment, where the margins of manufacturers are already under squeeze. A sharp one-shot increase in the cost of a universal intermediate like diesel will only add to their woes. It would help if the Reserve Bank of India signals a reduction in interest rates in its mid-quarter monetary policy review on Monday, which could at least partly offset the impact of the above cost pressures on industry. Now that the Government has shown through its latest actions that it is serious about fiscal discipline, and the monsoon’s turnaround since August has also somewhat eased inflationary expectations, the RBI can afford to be more accommodative.

(This article was published on September 14, 2012)
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