The Government of India has deregulated the price of Diesel in India. The Government will no longer be the deciding authority over diesel prices here. That authority over increase or decrease of diesel prices will now be decided by oil retailers like Indian Oil Corp, BPCL and HPCL.
Let's take a look at what is bound to happen:
Deregulating means that diesel prices will now be market oriented. That is, if global crude prices go up, consumers will have to pay more and if it drops, customers pay less.
The diesel price was cut by Rs 3.37 per litre today because global crude prices have dropped to below USD 90 per barrel. Oil retailers have made a big profit on diesel since September 16.
The drop in diesel prices will lead to a further cool off in inflation, because diesel is the most used fuel for the agriculture sector and transportation industry. Both these sectors affect food prices.
A further cut in inflation will pressure the Reserve Bank to cut rates, which will further increase demand in the economy.
The government's subsidy bill will come down. Last year (2013 – 14), the Indian government had to pay INR 85,000 crore for diesel, LPG and kerosene. The subsidy this year is estimated to be much lower, around INR 63,000 crore.
Lower subsidy lets the government meet its fiscal deficit target, which is 4.1 percent of GDP, which will be a bonus for the Indian economy.
The Lower fiscal deficit will reduce the government from borrowing and increase its spending, which will add to our country's economic productivity.
Our country imports more than 75 percent of domestic oil needs. The biggest figure in the import bill is oil. The drop in crude oil prices will lead to a reduction in import bill and there will be a positive impact on the rupee.
The sales of diesel account for nearly 55 percent of overall sales of oil marketing companies. Till date, these companies had to pay part of the subsidy on selling diesel at below market price to the government.
Deregulation will bring private companies like Reliance Industries and Essar Oil into the picture. These brands do not get government aid for selling diesel at discounted prices and currently sell through state refiners, in spite of having their own sales infrastructure.