Opinion Now let go

The government has a unique opportunity to bring in a game-changing economic reform without consumers feeling the pinch. Thanks to the falling brent crude — at $ 92.31, it is at a 27-month low — and the phased increase in diesel prices (50 paise per month) instituted in January 2013 by the UPA government, the three government-controlled oil marketing companies (OMCs) have started realising over-recoveries of Rs 1.90 per litre. But instead of simply revising diesel prices downwards to reflect the changed market situation, the government should, model code of conduct permitting, use this opportunity to let go of diesel pricing altogether, just like petrol was deregulated in June 2010.

One of the reasons it has been hard to decontrol prices has been the fear of a strong impact on inflation. But the high budget and current account deficits that are run to sustain the fuel subsidy — diesel underrecoveries alone were Rs 63,000 crore in 2013-14 — also contribute to inflation. The linkages between deficits and inflation are complicated. And it isn’t just about saving government money either. The subsidy is spectacularly misdirected — 13.15 per cent of diesel usage is by private cars and utility vehicles and 9 per cent by industry, including industrial gensets. Was this the raison d’etre of the subsidy? Dismantling the subsidy is also about helping one of India’s most important sectors grow. It’s no secret that the OMCs are reimbursed fitfully and payments are often postponed in order to dress up budget numbers. Once deregulated, the private sector would be able to enter the market, increase competition and improve efficiency.

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The government shouldn’t stop at diesel. It’s time to replicate the success of incremental reform in small doses and a good place to start would be the LPG subsidy. Given that 97 per cent of LPG users fall within its net, it is safe to conclude that it is enormously misdirected. A small and frequent price hike would go a long way. But there’s many a slip — in 2002, diesel prices were deregulated, but this decision was rolled back in 2004 when crude prices started increasing. The Centre must guard against policy flipflop.