Deregulation of Petrol Prices

  • SumoMe

What is deregulation? Deregulation of petrol means that the Government will no longer subsidise petrol prices. The prices will be completely linked to international crude prices (It will be determined by the market-driven forces of demand and supply).

Present situation Kirit Parekh Committee had recommended complete decontrol of petrol and diesel prices last year: Since then petrol prices have been deregulated but not the prices for diesel. Petrol prices have been raised 4 times this year (Rs 3.14 in Sept and then Rs 1.82 last week being the most recent hikes) The Government is planning to deregulate the prices of diesel and LPG as well.

Its immediate implications:

1.Rise in petrol prices as well as other commodities.

Its advantages:

1.It will reduce our long term debt and fiscal deficits. (The Government’s target is to maintain fiscal deficit at  4.6% of GDP which is difficult to maintain if it continues to provide huge subsidies on fuels)

2. It will bring in private players like Reliance and Essar which closed its oil marketing operations after the crude prices touched $150 barrel 2 years ago. This will bring in good quality and service at competitive prices like it did in the Telecom sector.

3. It will also give the advantages of lower international crude oil prices to the consumers.

Its disadvantages:

1.It has worsened the already high inflation rates in India.

2. The gap between diesel and petrol prices gives incentives to consumers to own diesel cars and use fuels earmarked for the poor.

3. Petrol pump owners resort to hedging of petrol. Eg:-The owners will sell crude oil futures if he expects petrol prices to fall and profit.

4. It encourages hoarding and black-marketing of cheaper fuels like kerosene (as these fuels are subsidised and are cheap)

Solutions

1.Government should slash VAT (sales tax) and Excise duties to reduce the impact of price rise to consumers. Presently almost 50% of what we pay as petrol prices are taxes

2.Other long term policies such as -under sea pipes to reduce the cost of shipping could be taken.

3. Alternate energy options and technologies to reduce dependence on petroleum should be considered

4Good storage facilities to take advantage of lower crude prices

My views: In the long run the deregulation of price is the right thing to do. Fuel subsidies are not sustainable in the long run.

Mridusmita Choudhury

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