• Why does the Indian Government not in a position to de-regulate Diesel and Kerosene prices?

    Indian government has deregulated the petrol price partially during last year 2010 but it is still not in a position to de-regulate the diesel and kerosene prices even after providing high subsidy for the same.

    To understand the reason let us look at the advantages and disadvantages to increase the petrol/diesel/kerosene prices hike…

    Advantages:

    • Reduces the subsidy bill provided by the Government for selling petrol/diesel/kerosene at much below the global market prices. The subsidy burden becomes huge at the time of very high crude oil prices.
    • Reduces the fiscal deficit by decreasing the subsidy bill. Lower fiscal deficit is very important to maintain the current stable credit rating and keep the market borrowing rate stable.
    • Improves the profit margin of the state run oil marketing companies and the oil and gas explorer (upstream) companies. The whole subside burden is divided among the Government, oil upstream companies (ONGC, Gail India and Indian Oil) and the state run oil marketing companies (IOCL, BPCL and HPCL). Reduction in total subsidy burden reduces the subsidy burden of each of these companies and increases the profitability and earnings.

    Disadvantages:

    • Price increase in fuel prices put upward pressure on the inflation. The fuel inflation has 15% weight in the headline (WPI) inflation of India. Only High speed diesel is having 4.67020% weight in the WPI calculation which is used to measure inflation inIndia. Increase in the price of petrol/diesel/kerosene increases the inflation in short and medium term. But in the long term (next year same period), the impact will be negated by the higher base effect of the current year.
    • The diesel price hike also increases the freight charges which increases the food inflation and cost of infrastructure development significantly.
    • Kerosene price hike will put lots of lower class people in trouble as kerosene is mostly used by poor and lower middle class people.

     Why was only Petrol deregulated?

    Now let us look at how the petrol/diesel/kerosene price hike affect people in the country and what type of people are affected by the same…

    Petrol is mainly used by cars and bikes which are used by mainly middle class and upper middle class people. So petrol price hike mainly affects upper middle/upper class people. Petrol is having only 1.08% weight in the WPI calculation.

    Now check for the diesel price hike affect

    • Only High speed diesel is having 4.67020% weight in the WPI calculation which is used to measure inflation inIndia.
    • Diesel is used by trucks for freight and cargo transportation. So diesel price hike increases the transportation cost of food articles, vegetables and other consumer goods which increases the food inflation. End result, all the people are getting affected by high inflation.
    • As Diesel price hike increases the freight and cargo charges, it will also increase the manufacturing cost for infrastructure development which needs more transportation of goods. All the infrastructure companies are affected by the same.
    • Diesel is used to run machine in the factories and plants. Diesel price hike increases the input cost for all the factories and plants. All the factory workers will be affected because of higher input cost.
    • Farmers use diesel to run tractors and generators even to get water from underground. Diesel price hike affects all the farmers, mostly are either lower-middle class or lower class.
    • Kerosene is mainly used by lower class and lower middle class people to lit lamp at night and as cooking oil. That’s why kerosene price is very highly subsidized. Kerosene price hike affects the poor and lower class people severely.
    • Cooking LPG gas is used by all the households irrespective of class. Cooking LPG gas cylinder hike affects all the households be it middle class, lower middle class or upper class.

    Now considering all the situations it is really not possible for a developing country like India to deregulate diesel/kerosene/cooking gas prices even if it deregulates petrol price. It will continue until India becomes a developed country and per capita income rise to the standard level to think about the deregulation.

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