The Political Economy of Diesel Price Deregulation
India will decide on ending government control on diesel pricing after elections in two states next month, an oil ministry source said, even though local prices of the fuel are currently higher than the global rates, making a case for a cut in retail prices. This is perhaps the first time that retail prices in India are higher than the global rates due to a sustained monthly rise in local prices since January 2013. "We tinker with diesel prices once a month...There is a case for a cut in diesel prices towards the end of the month but a decision is yet to be taken on that," the source with direct knowledge of the matter said. "The diesel under-recovery has been wiped out and there is over-recovery of Rs 0.35 per litre with effect from Sep. 16," a government statement said on Tuesday. The government will consider decontrolling diesel and cut the fuel's price by 40 paise per litre this month as the sharp fall in global crude oil prices has paved the way for a major reform in fuel pricing, government and industry sources said. The fall in global prices has helped state oil firms make a profit on diesel, which has been a source of heavy subsidy burden for about a decade. The government is weighing the political impact of fuel pricing as elections in crucial states of Maharashtra and Haryana are due in weeks.
North –South Consensus on Fuel Price Reforms
Officials said that the government has to take a call on whether or not it should announce price deregulation simultaneously with the cut in diesel prices. "Oil minister Dharmendra Pradhan is expected to consult senior cabinet ministers on diesel price issue after he returns from Vietnam this week," one source said. Finance Minister Arun Jaitley and RBI Governor Raghuram Rajan have already expressed their keenness on fuel price reforms. Before the unexpected fall in global oil prices, Jaitley had told Parliament that the government would be able to decontrol diesel fully in a year if there are no international shocks in the oil sector.
Good Economics is Good Politics
Diesel price deregulation will be a major policy reform of the Narendra Modi government but, it is concerned about sudden spike in international oil prices in the near future that would adversely affect ruling BJP's polls prospects in Maharashtra and Haryana, sources said. Assembly elections in the two states are scheduled on October 15. State oil marketing companies are currently gaining about 40 paise per litre revenue on diesel compared to its assumed market price. Companies have gained from fall in global prices and the gradual increase in retail price of diesel. But, petrol consumers will not gain from the sharp fall in global crude oil prices as its prices are likely to remain steady, sources said. Crude oil prices tumbled below $98 last week, falling to the lowest in two years, but India's fuel pricing system links petrol and diesel rates to their respective international benchmarks, which don't always move in step with crude. Exchange rate also influences local prices. Petrol prices may not be hiked this time, one of
them said. The government has directed oil companies not to raise diesel prices by 50 paise by end of this month if over-recovery continues in rest of the month, an industry source said. In fact, a diesel price cut is expected by the end of this month after the cabinet reviews the fuel price scenario, the source said. But, the Election Commission may not allow a price cut ahead of assembly elections, the source added. Government officials say that the oil ministry may have to take permission of the Election Commission to reduce diesel prices before assembly elections because of the model code of conduct.