Diesel

14 NIVESHAK
Cover Story
Diesel Deregulation &
Pricing Issues
Prakhar Nagori & Palash Jain
IIM Shillong
Introduction
Over the past decade there has been a tremendous
pressure on India’s fiscal budget because of
the huge subsidy bill. These subsidies majorly
comprised of food and fuel subsidies. India is
the fourth largest consumer of fuel and because
it’s a developing country the demand keeps
rising pushing the fuel subsidy bill higher and
higher. The fuel subsidy has risen exponentially
from 0.6% of GDP in 2004 to almost 2% in 2010.
The subsidy on fuel was estimated at around
INR 1.82 lakh crore for the last two financial
years, that is, 2012-13 and 2013-14. According to
some economists, the diesel subsidy has cost
India around INR 3 lakh crore in the last five
years. With the rupee depreciating drastically
and increase in international crude oil prices,
this bill was increasing in leaps and bounds
and deregulation of fuel prices had become a
necessity.
However, this decision to deregulate the prices
of fuel is not a recent one. The petrol and
diesel prices were deregulated in 2002 by the
Atal Bihari Vajpayee government. But when the
government changed in 2004, this decision was
overturned by the then petroleum minister, Mr.
Mani Shankar Aiyar. As a consequence the fiscal
deficit started shooting up.
In 2010, the government of India then decided
to deregulate the petrol prices to reduce the
pressure it created on fiscal deficit, as a result
of which the fuel subsidy bill started declining.
In continuation to this policy, the government
decided to deregulate the diesel prices which
would reduce the fuel subsidy bill to 0.4% of
GDP in 2014-15 as compared to 0.8% in 2013-14.
NOVEMBER 2014