The governments move towards partial decontrol of diesel prices has two components: a) market pricing for wholesale buyers and b) pre-announced gradual increase in retail sale price.
Most bulk buyers (including state road transport undertakings (SRTUs),power plants and industrial consumers) would prefer to access retail outlets,rendering option (a) ineffective. The only other option is to physically restrain them.
Even as price decontrol is desirable,the latest move appears retrograde. The only likely victim could be the Railways,rendering its services more incompetitive with respect to road transport. It may,however,not be entirely impracticable for the Railways to access retail outlets or shift to LNG to reduce fuel cost. The strategy is likely to kill the wholesale market for diesel.
At worst,the price of this fuel would be high (by a wide margin) for the bulk buyer as compared to the retail buyer.
In addition,with no allowance for input tax credit (VAT) on bulk purchases,cascading taxes would end up fuelling cost-push inflation.
Now to part (b) of the announcement. A gradual increase of 0.45 paise per litre (exclusive of VAT) per month is presumed to be politically more feasible. The impact on inflation is presumed to be subdued if producers absorb costs and prices are not revised.
Political feasibility depends on the capacity to usher in a surprise. A pre-announcement loses this attribute and risks being labelled as posturing. The annual inflationary impact may be scarcely different from a single-step jump. The move could also cut-short the planned crawl.
For example,there is little relevance to continue with an 80:20 weight to import and export parity prices for diesel as trade parity benchmark,now that India has emerged as net exporter of diesel. The finance ministry has proposed a rethink on resetting benchmark costs to export parity. This is likely to significantly lower estimated under-recovery.
It is desirable to control fuel subsidy in the short-run and possibly eliminate it in the long-run. But,pussy-footing on diesel prices is unlikely to reduce the subsidy bill or improve its targeting in the short run,and in the long-run would be ineffective at incentivising better resource allocation.
(The authors are with NIPFP,New Delhi. Views are personal.)