It turned out to be a Super Saturday for the energy sector as the Cabinet cleared long-awaited reform measures such as deregulation of the diesel price and new prices for domestic natural gas. Diesel price deregulation was on the cards given the gradual fall in under-recoveries over the past couple of months, thanks to the prevailing soft global oil prices.
The sharp fall in oil price has helped the government gift-wrap what is essentially a tough reform measure with a cut in the price of diesel. In that sense, the timing of the deregulation is just perfect. The unsaid part of the deregulation is that it is a double-edged sword — if global oil prices rise, then domestic retail prices will rise too. Oil companies will now have the freedom to adjust prices at periodic intervals to reflect the global oil price and exchange value of the rupee versus the dollar. There will no more be the cushion of subsidy to protect domestic consumers.
With two major fuels — petrol and diesel — now shifted to market-pricing mode, the pressure on the Centre’s fiscal deficit will ease as there will be no subsidy to bear on this count. But importantly, the advent of market pricing is also expected to bring back private players such as Reliance, Essar and Shell into the retail market.
Together, these players were operating in excess of 3,000 outlets till they closed them down a few years ago as they became unviable.
The true test to the government’s commitment to deregulation and free pricing will come when oil prices reverse direction and start rising again. Global prices go through cycles and at present, it is a down-cycle; the trend will eventually reverse when either consumption rises or oil-producing countries cut back on output, or if both happen together.
Domestic retailers will then be forced to increase retail prices with the consequent domino effect across the economy on prices of all commodities, including essential ones.
