It was a long-awaited reform measure but when the Narendra Modi government eventually deregulated diesel pricing on Saturday, the timing, in the backdrop of falling global oil prices, was just perfect. With oil companies wiping off the under-recoveries on diesel and going into surplus, the government could sweet-coat what is essentially a bitter pill with a cut in retail price of the transportation fuel. While consumers may rejoice over the benefit now, they need to be conscious of the fact that when the wheel of global oil prices turns into an up-cycle once again, the domestic retail price of diesel will go up. That is also when the government’s commitment to the reform measure will be tested. In a deregulated regime, oil companies will adjust diesel prices at periodic intervals to reflect the prevailing international price of oil, just as they do now in the case of petrol. This is as it should be. Subsidies, including on diesel, have been exerting tremendous pressure on government finances, leading to a widening fiscal deficit. The 2014-15 Budget had projected a subsidy burden of Rs.2,46,000 crore, of which petroleum subsidy accounted for Rs.63,500 crore. Thanks to falling oil prices in the last few months and deregulation of diesel now, the petroleum subsidy is expected to be substantially lower than the budgeted level, thus easing the burden on the fisc.
The Modi government has also done well in deciding to deposit the subsidy on cooking gas directly into the bank accounts of consumers. The government should do the same for kerosene subsidy as well given that leakages are the highest there, but only after ensuring that no deserving recipient is left out. The new Jan Dhan accounts could be used for this purpose. With petroleum subsidies now being addressed, the focus should shift to reducing fertilizer subsidy, which is about the same quantum as that on petroleum. Meanwhile, in the other major announcement on Saturday, the government finally addressed the contentious issue of domestic gas pricing which has been hanging in the balance since the start of this year. The formula has been tweaked to curtail the increase envisaged under the Rangarajan formula by over two-thirds thus containing the final base price to $5.61 per million metric British thermal unit. The government has done well in granting a premium to gas produced in ultra-deep water, deep-water and technologically challenging areas as production costs will be high but the fine print that provides details on premium calculation has to be read closely before a final assessment is made. The point, ultimately, is to balance the interests of consumers who desire the cheapest price, and of producers who would want their costs covered fully and topped by a decent margin.