The Indian government has been grappling with issue of diesel price deregulation for a couple of years now. Finally, the government has bitten the deregulation bullet, albeit a partial one at that. The diesel prices have been partially deregulated which means that the state owned oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum will be allowed to periodically hike or revise prices of diesel fuel. However, the “partial deregulation” caveat means that the Indian government will continue to have a big say over the hikes of diesel prices. As of now, diesel prices remain the same, although a hike cannot be ruled out in the next few weeks.
A couple of weeks ago, the Indian government hinted at increasing diesel prices over the next ten months through 1 rupee price increases, to make for a total price increase of 10 Rupees. Currently, the state owned oil companies lose about 9 to 10 rupees per liter of diesel sold in the country, leading to a big deficit in their annual revenues. This deficit means that the Indian government subsidizes the oil marketing companies to the tune of several thousand crores each year. The subsidy burden mainly caused due to diesel has led to the country’s fiscal deficit expanding.
The Indian government’s latest move to partially deregulate diesel prices is aimed at reducing this growing fiscal deficit given the fact that the expanding fiscal deficit could seriously affect the country’s finances. The hike in diesel prices is expected to have a cascading effect on inflation given the fact that the fuel is used on a large scale by farmers and the transportation sector. Diesel car sales could also slow down as running costs could go up dramatically if indeed the oil marketing companies go ahead and hike prices by 10 rupees, a figure which happens to be the current under recovery per liter of diesel.
Also, a big hike in diesel prices is expected to shift demand towards petrol powered cars as the higher cost of diesel cars might make buying them infeasible for those driving less than say 1,000 kilometers a month. So, petrol cars might make a comeback if the oil marketing companies choose to hike diesel prices to an extent that eliminates the under recoveries. A silver lining for the Indian car industry however, is the fact that the partial deregulation of diesel would obviate the need for the additional tax on diesel powered cars.