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The oil companies are itching for it, and Raghuram Rajan is pitching for it. But will the Modi sarkar seize the moment and do the switching? The switching from government-dictated diesel rates to market-based pricing, that is. If this happens, diesel will be decontrolled and follow in the footsteps of petrol.
What is it? Diesel decontrol will give oil marketing companies (OMCs) — Indian Oil, HPCL and BPCL — the freedom to fix prices of diesel based on their own cost and profit calculations. For years, the Government, to shield the aam aadmi , has been forcing the OMCs to sell diesel, domestic LPG and kerosene at below their notional costs. So, ‘under-recoveries’ incurred by the OMCs have been corroding their finances. It also impacts the finances of upstream oil companies (ONGC and Oil India) and GAIL, and the Government, which compensates oil marketers.
The ‘losses’ on diesel accounted for nearly 60 per cent of oil company under-recoveries in 2013 and things came to a pass when total under-recoveries shot up to about ₹160,000 crore. But raising diesel price sharply then would have added fuel to the raging inflation. Thus, the UPA government in January 2013 hit upon the ingenious idea of monthly 50-paise hikes in diesel price. This incremental ‘decontrol’ muted protest and reduced diesel under-recovery slowly but surely.
Crude oil prices have been falling in recent months and the rupee is stable, therefore the diesel under-recoveries have been neutralised. In fact, the OMCs are now making 35 paise more on a litre of diesel than intended. That’s why this seems to be an opportune time to free diesel from controlled pricing. If done, you and I will pay less for the fuel for the first time in many years. Difficult decisions, when sugar coated, are palatable. But with a few State elections due next month, the Government may not want to shake up things now.
Why is it important? Petrol prices were decontrolled in June 2010 but the Government has treaded with caution on diesel. Unlike petrol, diesel has a variety of uses including in commercial transport and agriculture. Any tweak on diesel affects the costs of ferrying goods throughout the country and has a trickle-down effect on inflation.
That’s why the government, on the back foot due to inflation hasn’t yet gathered the gumption to go the whole hog on diesel. That said, diesel decontrol makes economic sense. It will remove uncertainty about pricing and improve the finances of the oil companies and the Government. It will encourage responsible consumption of the fuel and cut down on undeserved subsidy — do SUV owners deserve cheap fuel? Postponing the measure on the pretext of inflationary pressures is only kicking the can down the road. If the fiscal deficit rises, that will anyway eventually lead to inflation.
Why should I care? The diesel decontrol sword can cut both ways. You may pay less for the fuel in the immediate future but must brace yourself to shell out more if crude oil rises or the rupee slips. This means more unpredictability. Free pricing of diesel could also affect your choice of cars. With the gap between diesel and petrol prices narrowing, the cost savings on diesel cars are reducing. But do the math before you decide.
The bottomline Diesel decontrol is an idea whose time has come.
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