Diesel prices in India hiked by INR 5 per liter; New price to take effect from midnight

The Indian government has finally bitten the bullet that could have multifarious political ramifications. The diesel prices have been hiked by INR 5 per liter. This is one of the biggest hikes that the price of diesel has seen in recent times given the hike is more than 10% of the price of diesel. From midnight today, you will have to fork out extra when you tank up your diesel car at the fuel station. On one hand, the diesel price hike is good for the economy given that the state owned oil companies have been bleeding heavily, with losses due to underpricing diesel amounting to over INR 1 lakh crores for 2012 alone.

Petrol & Diesel Price India: Picture of a Fuel Tank

A Diesel Tank used to illustrate the diesel price hike

Naturally, these losses will eventually be absorbed by the Government of India, through subsidies doled out to make good the losses suffered by these companies due to the underpricing of diesel. The government will in turn extract money out of the exchequer for this subsidy. All in all, the fiscal deficit of the country will increase due to this move, that could severely impair India’s balance of payments, stuff that could affect trade into the country in the long run. While this is the worst case scenario that could unravel due to the government subsidizing diesel fuel sold by the state owned oil companies, in a nutshell diesel subsidies are simply not good for the Indian economy.

The immediate effect of the hike in diesel price will lead to the inflation spiking up as diesel is a major constituent of the wholesale price index(WPI). This could have a cascading effect on prices of essential commodities as diesel is the major fuel used by the transport sector that transports these goods. However, the government seems to be of the view that the hike, though painful will be something that the average man/woman on the street needs to stomach for the greater good of the nation. This is what the Indian government has had to say about this hike.

Such a steep hike on diesel has already prompted angry reactions amongst the citizens of the country and the political parties alike. This could perhaps lead to the price of the diesel being rolled back, as has been the case time and again, more so since the government has hiked priced by a whopping 10%, which is the largest ever in terms of diesel prices historically. So, a roll back is something that isn’t out of the question. Also, the states might go easy on the sales tax that they impose on diesel to do their bit to sweeten the bitter pill, to reduce the quantum of diesel price hike by just that bit. Watch this space.