Fuel price reforms in India and its implications

Abstract

This contemporary concerns study deals with the impact of fuel price reforms on the Indian economy. The unexpected rise of global crude oil prices made the government realize that it is not possible (and sometimes unnecessary) to subsidize the fuel prices. It highlighted the importance of fossil fuels in India’s growth, the high dependence on fuel imports and the need for a stable pricing mechanism for the benefit of all stakeholders in the long run. The oil scenario in India is unique from those of other emerging economies like China and Brazil and hence we have to pursue an indigenous solution The Kirit Parikh committee report on fuel pricing highlights many concerns of the government and the ‘common man’ whom the government wants to protect from astronomical fuel prices. While the committee took a clear stand that the fuel prices should be deregulated in stages, yet it made some assumptions to arrive at the stated conclusion. This report challenges some of those assumptions like constant retail fuel prices for the next two decades, providing compensation to farmers by increasing the minimum support price (and thus fuelling price rise of grains and pulses which will affect the common man the most), uniform increase in the per capita income in agriculture throughout India and calculating the effects of fuel price hike taking zero custom duty on crude oil import. Meanwhile the issue of directive subsidy is an ideal solution but it depends on the successful implementation of the UID program which is not expected to meet its national target within the given time frame. A detailed study of the year wise break-up of the total under recovery shows that fuel subsidy as a percentage of total subsidy provided by the government had reached alarming proportions of over 50% in 2007-08 and 2008-09. Even after the recent price hike on June 25th, 2010, the under recovery is still Rs 53000 crores. Complete deregulation of oil prices will result in a reduction of fiscal deficit by 0.7% (from 5.5% to 4.8%). The fiscal deficit figure will vary in between 4.81% to 5.5% for partial de regulation. The impact of the oil bonds issued by the Indian government on fiscal deficit is also shown up to the 2026 On the inflation front, calculations show that the minimum impact of the last price hike on June 25th is 0.91%. Further if the fuel prices were to be de regulated in phases with diesel, LPG and kerosene in the specified order, the individual impact on inflation will be an additional 0.18%, 1.90% and 1.55% respectively. The deregulation of fuel prices will in the reentry of private players in the retail market thus providing more competition to the government owned OMCs. The reduction of losses will encourage the upstream oil companies to increase their exploration activity which is critical to India’s aim of reducing its dependence on oil exports. The use of kerosene to adulterate diesel will also decrease because at completely deregulated prices the difference between the prices of the two commodities will be reduced. The political implication of the fuel price hike is also discussed. In spite of stiff opposition from the parties which are not in power, the UPA government has not rolled back the last price hike. How far the BJP will go to protect the middle class against rise of LPG prices and whether UPA will go the full distance and risk alienating the ‘common man’ (votes) by increasing the price of kerosene will determine the future of fuel pricing mechanism in the world’s largest democratic country.