How did fuel price decontrolling affect India and its economy?

How did fuel price decontrolling affect India and its economy?
India decontrolled fuel prices almost one year back. How is it affecting indian citizens with different earning powers. Who are the beneficiaries? Is it helping to boost the 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)

Source: What 2014 Has in Store for Crude Oil Prices

  • 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.

In short,

  • 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. πŸ™‚

Other Impacts:

  • 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. πŸ™‚

Source: Oil subsidy expected to balloon

  • 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.

Source: Sell in India all you can offer

  • 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 Varsha Singh. 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.

Based on few comments received from TR Vejayanantham,

1. Does deregulation mean "no subsidy on diesel" at all?

No, There are still ways to give subsidies.

  • Government can still force OMC's not to raise the prices for the general public. But cannot order OMC's to refrain from raising the price.
  • Government can still offer some subsidy to OMC's but, the overall diesel price will be in sync with international crude price.

  • Advantage (for the government) of deregulation is that it can transfer the onus onto international market whenever there is a price rise.
  • Previously, opposition and people hated government for raising price. Now, they have to hate I don't know who.
  • Deregulation reduces control & burden on government on the pricing of oil.

2. How will deregulation of oil open market for private players? Haven't they failed in the past?

Yes, They failed in the past. but, one of the key reasons for their failure is regulation of oil prices. PSU's offered oil at cheaper price than the acquisition cost which is not a level playing field for private companies.

For PSU companies:

  • Before deregulation, prices of diesel are pinned to government policies.
  • After deregulation, prices of diesel are pinned to international crude.

For Pvt. Companies:

  • Before deregulation, prices of diesel are pinned to international crude.
  • After deregulation, prices of diesel are pinned to international crude.

So, after deregulation, PSU & Pvt. companies came onto a level playing field. Before that, PSU received subsidy from government and offered diesel for lower price which is an advantage for them in a way.

Controlling these factors during a rising trend in international crude prices will become much more difficult with deregulation. πŸ™‚

How did fuel price decontrolling affect India and its economy?


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