On October 18, 2014, Govt. Of India announced that it was totally de-regulating diesel prices. Before this announcement, government followed a policy of increasing diesel oil prices by 50 Paise per litre every month. Whatever the international price of crude oil, the idea of having a monthly increase of 50 paise per litre would be to reduce the gap between the subsidised diesel prices and the international market prices.
Government was emboldened to de-regulate diesel prices since the international price of crude has fallen steeply over the last 4 months. The declining price of crude oil was a boon to the government of India . From a high of US $. 115 per barrel, the price of crude oil has fallen to Us $ 88 per barrel.
Annually, oil subsidies in India are usually round 1. 5 lakh crores. When the price of crude Oil had comes down to less than 90 Dollars a barrel, it really meant that there was no subsidizing by government. That is why government was reducing the price of petrol and diesel.
When the international price of crude oil goes down, there is absolutely no problem in de-regulating the oil sector. The market can fix the prices fairly and the consumers enjoy lower prices. However it is a different story when prices of oil go up in the international market.
It would seem that the government has taken an un-necessary step in de-regulating the oil sector at his time. There was actually no need is be the prices are down. There is no subsidy involved presently. This step was an un -needed concession to the business sector that government is going ahead with reforms. There are other reforms needed . But at this juncture, tinkering with the oil sector will create future difficulties. If crude oil prices go up internationally , then government will have to again subsidy oil. No democratically elected government in India at this juncture can just ignore public sentiment and allow oil prices to go up impossibly high.
Why dis-mantle a system which you may have to re-institute again ? If such a system is again put back in place, then there will be severe a setback in international economic circles that India was going back to its old system of a controlled economy ? Just because India has enjoyed 4 months of falling oil prices, the government should not have rushed to remove the existing system .
De -regulating the diesel sector does not change the actual reality. But it puts India at a risk to potential international fluctuations. There should be some ” firewalls ” to protect Indian economy from speculators and other risk takers in the international financial sector .
Hopefully the oil prices will remain stable at this lower level. But there will be choppy waters if oil prices rise again.