BackFinally, diesel prices on a par with the international market
A stable currency, soft crude oil prices and the 50 paise per month hike in local diesel prices meant that under-recovery is only 8 paise per litre as on Monday
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Twenty months after the government allowed partial deregulation of prices, diesel prices are finally close to parity with the international market. A stable currency, soft crude oil prices and the 50 paise per month hike in local diesel prices meant that under-recovery on this fuel is only 8 paise per litre as on Monday.
That is indeed something to cheer as it will cut the subsidy burden of the government. Credit rating agency Icra Ltd estimates that if these conditions remain the same (stable currency, low crude prices) diesel subsidy for the current fiscal year could reduce to ₹ 15,000 crore from ₹ 62,800 crore a year ago.
However, note that the overall fuel subsidy levels will continue to be high because of kerosene and liquefied petroleum gas (LPG, or cooking gas) doles. Secondly, there is no clarity on whether the government will allow hikes greater than 50 paise per month in case of a sharp fall in the currency or a sudden rise in crude oil prices.
A Citibank note estimates gross fuel under-recoveries to be ₹ 1.07 trillion in 2014-15, well below last fiscal year’s under-recoveries of ₹ 1.4 trillion. But only the complete deregulation of diesel prices would help; in that case, there could be a structural reduction in the fiscal deficit of about 0.5% of GDP, estimates Citibank.
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