The government must take advantage of the lowest oil prices in a year to deregulate diesel, RBI Governor Raghuram Rajan said today.
Brent crude, a benchmark for Asian and Indian buyers, has fallen 14 per cent since June to USD 96.38 per barrel. This together with monthly price increases of up to 50 paisa a litre has trimmed losses on the nation’s most consumed fuel to just 8 paisa per litre.
“Lower crude oil prices are helping consuming countries like us. Typically a lower oil price means a lower CAD, lower oil subsidies and lower inflation. We need to seize this moment to eliminate diesel subsidies completely. We should take this moment to eliminate diesel subsidies as soon as possible,” Rajan told a banking summit here.
The next revision in diesel prices is due this month-end and going by the present trend the under-recovery or the difference between the imported cost and the retailing selling price, will be wiped out with a minimal hike.
Even after the under-recovery is wiped out, the Cabinet has to approve de-regulation or freeing of diesel prices. This will empower the oil companies to change rates in tandem with cost like they do in case of petrol since June 2012.
“We can of course wait but the moment will leave us and we may be back to subsidising,” he said.
The NDA government has continued with the previous UPA regime’s policy of raising diesel rates by up to 50 paise a litre every month to bridge the gap between cost and retail prices.
Originally, petrol and diesel prices were deregulated in April 2002 when NDA government was in power. Administered pricing regime, however, made a back-door entry towards the end of NDA regime in the first quarter of 2004 when crude prices started inching up.
Congress-led UPA controlled rates as international oil prices went through the roof. In June 2010, however, it freed petrol price from its control and rates have since them moved more or less in tandem with cost.
In January 2013, the UPA decided to deregulate diesel prices in stages through monthly 50 paise a litre increases. Rates were last raised on August 31 after which losses have dipped.
Rates have cumulatively risen by Rs 11.81 per litre in 19 instalments since January 2013.
Oil Ministry officials said once the under-recovery is eliminated, a proposal would be put to the Cabinet Committee on Political Affairs for deregulation of diesel prices as was done for petrol.
Deregulation would empower state-owned oil firms to change rates in tandem with cost like they do for petrol.
Rajan admitted that there are significant geopolitical risks with Ukraine and the Middle East in turmoil leading analysts to worry that the current low oil prices may be a temporary phenomenon.
Last year, India imported more than 118 million tonnes of crude worth USD 144 billion, making it the largest contributor to a historic high current account deficit which had shot up to over 6 per cent in the middle of last fiscal forcing the government to unleash some unconventional measures like curbs on gold imports.
Dip in IIP shows recovery is still uneven
Reserve Bank Governor Raghuram Rajan today said the latest weak IIP data only underlines the fact that the economy needs a pick up in investment growth and that the recovery is still uneven.
“Friday’s data suggest that the recovery is still uneven, but it is in my view this is a recovery from the fairly low levels of growth we had reached. But capital goods production came down once again, durables good production has not picked up..however good auto sales suggest that perhaps that may augur good consumption numbers going forward.
“The monsoon is better than initially thought, exports growth has picked up. But what remains is the investment growth to pick up. Credit numbers haven’t picked up as strongly, but part of the reason might be that corporations are using financial markets – the bond and external commercial borrowing markets,” the Governor told a bankers summit organised by FICCI here.
Due to lower output from mines, utilities and factories, the July factory output data came down to 0.5 per cent year-on-year, the government data showed on Friday, down from June’s revised 3.9 per cent rise. This makes the April-July IIP data at a low 3.3 per cent.
“The bottom line is that while the macro indicators are improving we still have some way to go before we can declare we are out of the woods,” Rajan said.
However, he expressed hope that a stable government at the Centre will enable the economy stand out when compared to other emerging market peers.
In the quarter to June, the economy expanded by a more-than-expected 5.7 per cent, igniting hopes of a recovery as in the past two fiscals the GDP grew by sub-5 per cent.