With the increase in global crude prices which is circling around $ 96, there is a pressure on government to increase the price of diesel and LPG. The recent increase in the prices of diesel and LPG was done to give some relaxation to oil companies. From the past few months a debate is round the corner "should diesel be deregulated". If it is done now, it will act as support to the Inflation and if it is not Government will increase the Fiscal deficit.
So what's your view" Should government go for Inflation and deregulate Diesel or Increase Fiscal Deficit by not deregulating diesel, thereby going for a much higher inflation in future"
Words limit is upto 350 and deadline is Jul 17, 23:59:59
Inflation has further edged up to 9.44 % in June due to higher prices of fuel and manufactured items…
ReplyDeleteIn order to curb the inflation and protect the below poverty line people, the government has to subsidize oil. A part of this subsidy cost is absorbed by the government while the OMCs (oil marketing companies) bear the other half.
OMCs still incur a loss of around Rs.1.50 and Rs.15 a lt. on sale of diesel and kerosene, and Rs.227 on a cylinder of LPG
Not raising diesel prices does have a cost. Oil companies may make big losses, they will not be able to invest in development of oil supplies and if government subsidises then fiscal deficit will go up.
Oil production is growing modestly because of new discoveries but domestic refinery runs has outplaced oil production
If India is serious about moderating its oil demand (and reducing the crude import bill), it has to deregulate diesel prices
Deregulating the diesel prices mean that, the government will no longer be subsidizing petrol prices and the prices will be purely linked to international crude prices i.e the prices will be market driven
The deregulation of diesel and LPG prices will definitely increase the rate of inflation in short term. There would be a cascading effect in immediate price rise in commodities and other consumables. However, for long term I think it is a good move because at the end it will definitely reduce our long term debt and fiscal deficit. Our overall economy will get stabled in this case. Also, this will help OMCs to recover their losses immediately
The other advantage could be that the inflation, as of now is not real. We will get to know the actual inflation and variation of commodity prices only when the oil prices move according to the international crude prices.
The government, in the meantime, can try to reduce the excise duties and restructure the VAT to minimize the impact of immediate fuel price rise on inflation and the poor people.
Selective subsidy can help save poor consumer’s interest…
Indian economy is diesel driven, that is its transportation depends on diesel. The diesel cost will directly touch inflation rate. As per government reports Rs 7000 crore subsidy has been given to Oil companies as the distributors are not making profit from the current prices. The amount is for the next quarter of this fiscal only. After that there has to be revision in prices of oil. It will not be wrong to say that if the diesel and LPG prices are deregulated the cost will go up and with only Indian oil companies around the prices will not meet competitions. Hence there is need to introduce foreign oil companies before it deregulates the prices, if govt. wants to deregulate the price. This will ensure the government that due to completion in market the prices can be controlled up to an extent. Of course there have to derivations of laws before the market is open for outsiders to enter.
ReplyDeleteOn the other hand the EU is going through rough economic times and there is political instability in Middle East, which affects crude oil prices that went down $96 to $94 few weeks back and due to economic problems in Greece 60 million barrels of crude stored as reserve was released, to stabilise European economy. So the global crude prices cannot be estimated to be increasing always.
At this point of time if government deregulates prices of LPG will result in breaking back bone of middle class of Indian society. It is estimated that if LPG is deregulated too, the prices will be nearly double than that of current prices around this time next year.
So instead of deregulating price Diesel and LPG government should increase the prices marginally, introduce foreign oil company outlet in Indian cities, which will help government to curb energy prices. Hence improving its chance energy management and also surviving another election.
Government has time and again been tested on various aspects and the sometimes the most complicated ones such as terrorism, telangana issue just to name a few. Well deregularization of diesel and lpg prices is also one such complicated matter which is complicated and linked with masses. With increasing crude prices and the government subsidizing on it we are just increasing the burden on the government. Already the fiscal deficit on India is around 5 billion. For me the deregularization act should come sooner than later. The inflation may go up from 9.44% to the double figures but in the long run it this act will prove beneficial for the people as well as government also. The crude prices have touched all time high of USD 124 few months back and it is highly unlikely that they will further go up. In fact they went up because of the instability of Middle East and the African countries which now seems to be settling down. So the in the long run the fuel prices will come down. Moreover if the government has to subsidize they can do it on the per capita income basis. This will ease the burden on government as well as put fewer burdens on the BPL people. By deregularizing India can reduce the fiscal deficit upto 2% of the country’s GDP. This act will prove to be a balancing one for price hike in terms of inflation as the government can then plan on decreasing the taxes also along with many other beneficial acts that are possible. Last but not least the most important benefit of price deregulation will be reduction in corruption which is a major concern and is slowly paralysing the whole country. So in a give and take mechanism I would suggest that the prices of diesel and lpg should be deregularized as early as possible.
ReplyDeleteRBI has been continuously monitoring the rate for controlling Inflation and sustaining growth. India has been doing quite well with 8.5% growth in the so called “recovery year” 2010-11 when many other countries growth went down. There are apprehensions over recession by seeing the economy outlook in mostly in Euro countries PIGS. The apprehension has been complemented by growth of 7.8% in last quarter of 2010-11. The sudden decline in the growth rate raises concern over managing the growth with change in policies which is going against the development or Investment. This is mainly due to change in key rates 10 times in last 15 months.
ReplyDeleteOne of the many reason behind high inflation rate is crude oil prices since recovery. The government has deregulated petrol a year back after considering kirit parikh committee report. Diesel is the most consumed oil products in the country due to its diversified application in various industries, which was also proposed for deregulation . Indian refiners are heavily exporting diesel to other countries at international price but for India diesel price is regulated. The regulated price has become hurdle for the NOCs on compensating loss against the regulated price. The government is providing “Under Recoveries” through cash or oil bond, reducing the tax in crude import to the National Oil Companies. These policies ultimately incur heavy loss in revenue of the country or growth of GDP as a whole. In 2006, the government has considered the suggestions from Rangrajan committee report on burden sharing formula by which the change in international rates will absorbed by NOCs and consumer. This was done with regulating the price of Petrol, Diesel, LPG and Kerosene.
The government should pass on this burden to the consumers by deregulating the diesel. So, any hike in international crude oil price will affect the retail selling price of diesel which will alert the consumers on going for alternate source of fuel. This will reduce government expenditure of diesel under recovery from government to NOCs which is significant to the other fuels, lead to increase revenue which inturn higher growth of the country.
This comment has been removed by a blog administrator.
ReplyDeleteThe question raised in the topic is “should”.
ReplyDeleteWhile declaring the recent diesel price MOPNG minister emphasized that economic unfeasibility of the subsidy is the driving reason to increase price. Energy issues needs to be understood from various perspectives. The topic asks for an individual to take a stand on either of the two options. But taking a one side stand has been difficult on subsidies in Indian energy industry. The various perspectives need to be analyzed which associated with the issue:
Political: raising the price of diesel needs strong political will when the government is already battling from serious governance issues from social activists
Economical: the under recoveries suffered by the OMCs is a great financial burden on the nation. Predicting the volatility of crude is difficult. But missed inflation targets by RBI on numerous instances in past is also a serious area of concern
Social: The subsidies on energy are given by government to make stable social system for the end consumers who are citizens only by quenching the energy needs of its citizens.
The subsidy sharing mechanism calls for weighing different perspectives differently as per the need of the nation at the current time. It may sound not a very credible strategy as it runs long term focus but it will be a democratic strategy, where political economical loss is incurred to the nation as a whole. In diesel case, with agriculture and manufacturing sector consistent excessive reliance on diesel continues following can be adopted for short and medium term (5 years) and long run( 10+ years).
Short and Medium term: reduce the disparity of price between petrol and diesel, to insensitize the excessive reliance on diesel. the price of diesel must be raised to an extent where the diesel price does not produce further pilferages in the system. And to sustain good quality of diesel at a competitive price commensurate increase in kerosene must be made to avoid adulteration.
Long term: to mitigate the import burden, search for inter fuel substitution so that diesel dependence for transport and captive power is reduced
Everyone is facing the brunt of the rising prices. The rise in the petrol prices is the result of bad policies. The US and the IEA hold significant crude inventories. The release of these inventories would relieve the pressure on the prices. There is no real reason for prices to be very high, but one reason is that production costs are high. Cost of petrol barrel includes production cost, shipping cost, excise duty, education and vat tax, distribution and transportation cost.
ReplyDeleteIn order to curb the inflation and protect the below poverty line people, the government provides subsidy. This increases our fiscal deficit. But the deficit is essentially servicing current consumption and not financing capital investment, which should be the case. India is spending more on interest payments for the money it borrows from the banks and other non-planned expenditure than on development. Conventional wisdom tells us that money that is borrowed needs to be invested in areas where the return generated is greater than interest to be paid on the debt.
Deregulating the fuel price might seem as a step to secure the vote bank for the upcoming elections, but it will definitely reduce the misusing of one the most limited sources of energy. Also bring the fiscal deficit undercontrol.
It will boost private players to come in the market, a sector dominated by PSUs. The competition will not only bring in quality product and services but also keep the price in check. The government in the mean time should explore alternate energy source options and technologies . Also Taxes are the most important source of revenue for the government. Increasing the taxes is not an option but the government should widen the tax net.The services sector, which forms almost 50 per cent of the economy, contributes less than 5 per cent of the total taxes collected. More and more people should be made to pay taxes.
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Balancing Inflation and the GDP Growth have always been the twin troubles for policy makers and the government in India. In India the current Inflation is hovering around 9% and the GDP growth has always shown impressive rates close to 8%. But the situation has drastically changed in the Indian context in the last 1 year. The deregulation of petrol prices as proposed by Kirit Parikh Committee hasn’t changed the scenario of Inflation as expected. Moreover RBI has increased Repo and Reverse rates close to 10 times in the last 1 year to control inflation but no positive outcomes have emerged. Apart from the fiscal policy intervention government has made no efforts to improve the efficiency of the supply chain of agricultural sector. With such half hearted approach, such measures have only exacerbated the worries of the industry and the common man with a higher cost of lending.
ReplyDeleteNow with deregulation of the diesel prices the short term inflation would again appreciate severely drastically affecting the lives of the common man. With this policy measure, the fiscal measures taken by the RBI would be severely affected as any increase in the price of diesel will have direct impact on inflation. Transportation cost of goods will increase and at the same time input cost of all the goods we consume will go up. Agricultural commodities prices is expected to go up instantly. A simple calculation suggests food grain prices rises by 50% of absolute rise in the price of price of diesel. Hence this step would negate the efforts of the RBI and this may lead the RBI to go for further rate hike.
Thus the recent policy initiative to increase the diesel prices would definitely give a fillip to the expansion plans of OMC’s as diesel subsidies contribute to 45% of the under recoveries of the OMC’s. This would also help the E&P Companies like ONGC & OIL who also had to share the subsidy burden. But this measure would have little respite for the market as stock market is expected to trade with negative bias. Capital is also expected to move from stock market to bond market where the return is risk free. This would also affect major sectors like Banking, Automobile, Real Estate, Consumer Durables and as a result FII inflows would also be reduced.
Thus the whole story of India Shining would be ???
ketan mehta said..
ReplyDeletederegulating diesel prices as of now would be blow to the government as such it has been accused of all sorts of corruption charges.it may lead to topple up of govt. and deregulating diesel prices there is an impetous to inflation. as our economy is diesel driven and any increase in price of diesel would lead to severe blow to transport of consumer goods and curbing the inflation in consumer goods would be very difficult. and let me explain the vicious cycle of inflation. the introduction of NREG and increase in labor wages in current budget has changed the consumer preferences of durables. there is more of demand of consumer goods and the infrastructure lack to supply goods has skyrocketed the prices of consumer durables. as people cannot afford this prices they ask for wage increase and inturn the employer increase the cost of goods which he produces and again there is rise in prices and between this if deregulating diesel and increasing transport cost too!! as such it has been very a challenging task for rbi tokeep the inflation below double digit. what measures rbi will have to take to tame the beast called INFLATION?
recall the case of rise in onion prices and just imagine if this spreads in many other consumer durables. will the govt be able to respond to such a situation? may be yes,may be no.but there is going to be a lot of chaos meanwhile.