What Does Diesel Deregulation in India Mean?

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oi-Sunil

By Sunil Fernandes

Published: Monday, October 20, 2014, 12:38 [IST]

On Oct 18, the government of India took a bold step to deregulate diesel prices in India. What this means in simple terms is that diesel would now be priced at market price, instead of the government subsidizing the same as earlier.

What does diesel subsidy actually mean?

Diesel prices in India has never been at market prices. The government had fixed a certain price of diesel and had to pay extra cost for diesel.

Let's give you an example. If the market price was Rs 60, the government for many years had determined a fixed rate and allowed diesel to be sold at Rs 50 (just an example). Thus, the government bore the extra loss of Rs 10 on the product, which is also called a subsidy.

As per some tentative estimates and news reports, the government of India's revenue loss on selling diesel, LPG and kerosene at lower than imported or market price cost it in this fiscal is likely to hit a sum of Rs 86,080 crore. This is still way below than the the previous fiscal's amount of a whopping Rs 1,39,869 crores.

What does diesel deregulation now mean?

Diesel deregulation would now mean the government's subsidy burden would be reduced, thus freeing-up large amounts of money for development and things like education and healthcare.

Diesel prices would now be revised every six months and lower prices would help poor farmers and also reduce the cost of transportation and inflation in the economy.

Fuel price deregulation has been in the agenda of every government, but, very few have had the audacity to link the it to market prices.

The NDA Government freed petrol and diesel prices, but according to reports the UPA government reversed it in 2004. In 2010, petrol prices were completely freed an aligned to market rates.

Reduction in international prices of crude a blessing

The NDA Government under Narendra Modi has managed to take the bold decision, as it comes in the wake of a sharp drop in international prices of crude.

After a Cabinet meeting last week, Finance Minister Arun Jaitley announced that diesel price stood deregulated to allow it to move as per market conditions, just like petrol. There will be an immediate respite of about Rs 3.50 per litre on pump price given the considerable reduction in international crude oil prices. This is certainly good news since lower diesel prices would help lower transportation costs, which in turn would help the common man.

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