Diesel disengaged

The Centre was able to live up to its reformist credentials by deregulating diesel thanks to sheer good fortune in the form of falling global crude oil prices. All the same, it deserves to be commended for seizing the moment at a time when such deregulation will cause minimal pain to consumers and industry. Thanks to calibrated monthly increases in retail prices of diesel since last year, decontrol will actually reduce fuel prices at the pump today, a situation no one would have envisaged a year ago. While it is best not to presume that this happy state of affairs (falling oil prices) will last forever, this reform move will have a salutary impact on government finances and the profitability of public sector oil companies.

Ridding the Central Budget of the diesel subsidy burden makes the fiscal deficit target of 4.1 per cent for this year, and the glide-path towards 3 per cent by 2016-17, appear far more achievable than they did a few months ago. With diesel subsidies now out of the equation (at ₹63,000 crore, they accounted for a fourth of Central subsidies last fiscal), the Centre now has greater leeway to stimulate the economy through higher capital spending. Lower deficits are also good news for Corporate India, as they will reduce the Centre’s prodigious appetite for market borrowings and keep market interest rates under check. Market-based pricing of diesel may also boost the profitability and market valuations of state-owned oil companies. Upstream oil companies such as ONGC and Oil India as well as GAIL took on nearly as much of the subsidy burden as the Government last year, reporting ₹67,000 crore in under-recoveries from discounting their products. With this undue subsidy draining them of cash flows, they have been hamstrung to invest in exploration to step up domestic oil production to meet the country’s burgeoning needs. Yes, oil marketing firms may now have to gear up for stiffer private sector competition in operating fuel outlets; but this is in the consumer interest as it will ensure that global oil price changes are quickly passed on to them. Lifting the prospects of oil firms, not to mention their profits, will result in a re-rating of their stock market valuations, translating into richer pickings for a Centre looking to divest its stake.

While the immediate impact of fuel price decontrol on the exchequer, investors and consumers is all good, it would be imprudent to assume that low global oil prices are here to stay. But with fuel prices freed up, consumers and policymakers should brace for more volatile inflation readings in the days ahead. As for the Government, it should stick to its guns on this reform, irrespective of where oil prices head in future. This will be the true test of its reformist zeal.

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