economy : How-will-deregulation-of-diesel-prices-effect-Indias-economy
Answer by Jai Parimi:
Tl;dr: Diesel prices will now be market-linked. So, diesel price moves in sync with global crude price.
- Since the global crude price is at a low of $90+/barrel and is likely to stay low owing to various reasons ranging from discovery of shale gas to slowdown of major economies. Immediate effect on diesel price is a fall.
(See the steep fall since Sep'14)
- Diesel is a major commodity used in agriculture and transportation. This will impact the prices of the day to day products (mainly food which has been a major contributor to inflation index). So, we can expect a cool off in inflation.
Agriculture(12%) and Transportation(64%)
- Lower inflation will improve purchasing capacity of common people. That will further boost demand in the economy.
- Fall in diesel price leads to fall in food prices,
- Fall in food prices leads to fall in inflation rate,
- Fall in inflation rate increases purchasing power of people,
- Increased purchasing power boosts the economy. 🙂
- Deregulation will reduce the diesel subsidy bill of the government which was at 92K Crores in 2012-13. This deregulation is expected to bring down the prices by 10K Crores. 🙂
- Lower subsidy means easier fiscal deficit target. This will be a big positive for the Indian economy.
- Lower prices in international market price also means lower import bill and hence reduced import-export gap. Petroleum products(17%) occupy a huge share of Indian imports.
- The boost in the economy will make RBI to cut the interest rates to increase the money supply in the economy.
- All these factors will have a positive impact on rupee.
To summarize, Lowering diesel prices after deregulation will
- Reduce fuel subsidy burden on government,
- Reduce inflation rate,
- Increase purchasing power,
- Impact positively on fiscal deficit,
- Reduce the import-export gap for India,
- Lead to rate cuts,
- Strengthen the rupee.
Thanks for the A2A . Please understand that "All these are possible only if the international crude oil prices stay low. Reverse the trend if the crude oil prices starts raising.
Controlling these factors during a rising trend in international crude prices will become much more difficult with deregulation. 🙂