Empowered group of Ministers on Friday, 25th June 2010, took a decision to decontrol the petrol prices increasing it by 3.50 per litre & that of kerosene by Rs 3 a litre. While petrol is mainly used by the middle class for cars, kerosene is used by the poor for power. Diesel prices rose by Rs 2 per litre and might be freed up in the future. Cooking gas prices were raised by Rs 35 a cylinder.
Govt. has indeed taken a bold step by deciding to decontrol prices of Petrol & increase the prices of Petrol, diesel and Kerosene prices. However, this move of UPA govt. is likely to have some implications. In these tough times, when, rising inflation is a continuous cause of concern, political parties that are eagerly waiting for opportunities to exploit it to their advantage and common man who is likely to be feel the pinch most, it is going to be tough for govt. to handle so many issues simultaneously.
Implications of Petrol Price Decontrol & Increase in prices of other fuels Impact on Inflation
Given the fact that, petrol and Diesel are the main fuel for the movement of goods, inflation is very much likely to increase. Most of the essential commodities such as pulses, vegetables and other cereal items are likely to become expensive due to increase in the transportation cost. Also the price of cooking gas has also gone up by 35 Rs. per 14.5 kg cylinder. All this is likely to inflict pain to a common man who is already bearing the brunt of high inflation this year.
Though it is very difficult to gauge the impact of inflation due to these prices rise but as per the finance ministry's chief economic adviser, Kaushik Basu, the price rises would impact headline inflation (WPI) by 0.9 percentage points but will result in lower fiscal deficits. The increase in the inflation would be short term and in six months the inflation would be lower despite index reflecting international prices. The total projected impact on inflation or whole sales price index is projected at 2.05 by Kirit Pareekh (Annexure: Table 1)
India ’s most closely watched WPI inflation unexpectedly accelerated in May to 10.16% year- on -year while the food price index also rose sharply in mid -June to 16.9%. According to Mr. Hajra, “Every two rupee- increase in diesel prices will have a 30 basis points rise as direct impact on WPI, and another 30 basis points by an indirect effect.
Moreover, in Annexure: Chart-2 we can find out that how regulated prices are creating an inflated demand for fuels. Let us presume that the interaction of demand & supply determines a price P0 for petrol. Now by giving subsidies, it reduces the prices of petrol to p1 for mass consumers, which in turn inflates the demand of petrol to O1 from O for some level of supply. In market driven scenario supply too should have responded with a decrease in supply from O to O2 to lower prices but that is not happening due to Govt. subsidies which eventually is resulting into inflation.
Impact on Fiscal Deficit
The primary reason of Govt.’s decision to decontrol is to reduce its bulging fiscal deficit which at present is whopping 4.12 trillion rupees, 6.5% of the country’s GDP. The decision is likely to help reduce the fiscal deficit from the projected 5.5 per cent of 2010 - 11 GDP and free up revenues for other programmes After economic reforms of 1991 under Narsimha Rao Govt., successive govt.s’ have shown little willingness to take significant steps to check fiscal deficit.
The govt. expects to bring down the fiscal deficit to 4.5% of the GDP in the fiscal year 2011 through generating revenue by fuel prices decontrol and 3G auctioning.
Fuel accounts for a quarter of its estimated subsidy bill of Rs 1.2 lakh crore ($25.5 billion).Before Friday's announcement, projected losses for oil firms are estimated at $24.4 billion i.e. this year, based on an average crude price of $85 a barrel. Moreover, if we compare the...