Why partial diesel de-regulation was important?

The Government surprised one and all when it took the bold decision to partially de-regulate diesel and asked OMCs to make small adjustment in prices over a period of time. Buoyed by the cabinet move, OMCs didn’t waste any time and increased diesel price by 45 paise per litre excluding taxes yesterday itself. This is expected to happen periodically now (monthly or fortnightly) until the pump prices reflect the market price of diesel. Also, for bulk consumers which constitute almost 17.77% of total diesel sales, the Cabinet has decided to allow the OMCs to sell diesel at the market rate without any subsidy. This move would result in reduction of under recovery on diesel by Rs. 12,907 crore per annum.

As part compensation, Government also decided to increase LPG subsidy cap to nine cylinders from the current six and also reduced petrol prices by 25 paise a litre.

Now the big question is that why will UPA II, which is already unpopular, will take such a decision that will certainly not go down well with the common people?

The answer is quite simple!  They don’t have an option.

The country needs to rein in the ballooning fiscal deficit which has literally derailed the economy and has pushed it to its lowest growth rate in a decade. With this decision the Government has shown its intent to bring the economy back on track even if it means taking decision which may harm their political interest.

Consider the alternative now. The country faces rating downgrade risk in the absence of improved economy which will push Rupee to Rs 60. This would have been the final nail in the coffin for an already faltering economy and would have taken years together to repair the damage.

With this move of Government, even RBI will be compelled to reduce key policy rates in its policy which will be announced towards the end of this month. While that will not be the end of all our problems, it will certainly help in reviving the sentiments further.

Conclusion

Government decision to partially de-regulate diesel is completely justified and need of the hour. Diesel subsidy doesn’t help the poor only but also the rich who use the money saved for other consumption purpose. While, the decision appears harsh to many, economic realities of the country cannot be ignored and lesser evil needs to be embraced in order to avoid bigger evil. While this is positive news for equity markets for sure, it is imperative that Government sticks to its stand and don’t buckle under the pressure of opposition.


By Rajat Gupta – Research Analyst – Concept Securities Private Limited