Diesel question: Despite no subsidy, govt not freeing up prices

Written by The Financial Express | New Delhi | Updated: Oct 3 2014, 13:24pm hrs
Diesel priceIf diesel prices are not freed up, private sector firms like Reliance and Essar will not set up petrol pumps.
If there was a large subsidy, such as the Rs 9.03 per litre it was in January 2013 or the Rs 14.5 per litre in September the same year, it would be understandable if the government didnt agree to free up diesel prices, no matter how strong the signal this would send on the continuation of economic reforms.

What is inexplicable, however, is why the government is refusing to announce that diesel prices are henceforth deregulated when, in fact, doing this would result in a cut of Rs 1.90 per litre.

Thats right, thanks to the UPAs policies of raising prices of diesel by 45 paise per month right from January 2013, along with the collapse in crude oil prices, PSU oil firms are now over-charging customers Rs 1.9 per litre of diesel. This makes it the perfect time to deregulate diesel, just the same way this was done for petrol.

So, if prices of crude oil were to rise internationally, though right now estimates are that prices will continue to remain soft, the oil PSUs will start raising prices automatically, just as they do for petrol.

While one argument for not linking diesel prices to free-market ones is that the government doesnt want to take a chance with prices rising in the future, this is seriously problematic.

For one, since the budget doesnt have the funds to pay the subsidy, the burden gets passed on to oil PSUs that, in turn, cut back on their investments to fund thisthere have been times where they have been so cash-strapped, they have been in danger of not even being able to pay for the crude they import.

Two, considerable investments need to be made in setting up retail outlets to meet Indias growing needsif diesel prices are not freed up, private sector firms like Reliance and Essar will not set up petrol pumps, which means the cash-strapped PSUs will have to set up the pumps, or Indians will simply have to get used to standing in petrol pump queues for longer.

If ever there was a move that sent out a very negative signal on the governments reform credentials, this is it.