Regulation of fuel prices has been a long standing debate in India's economics over the past many years. As we stand now, things are looking to change. Or so we believe. An empowered group of ministers is meeting today to decide on deregulating fuel prices. If the decontrol does happen, it will be a landmark development in India's oil & gas sector's history.
After all, control on fuel prices not just decides the profits of oil companies. It also is politically driven as fuel prices have a direct impact on prices of commodities that the 'aam aadmi' consumes. After all, while politicians might not always act for the benefit of the 'aam aadmi', they always make a hue and cry for things that negatively impact him. Of course, it's nothing more than noise!
Anyways, coming back to the fuel price deregulation, it would definitely bring a lot of respite to India's oil marketing companies. These companies have been reeling under losses by selling fuel (petrol, diesel, kerosene, and LPG) at prices that were even not enough to meet their costs. Market driven pricing will thus allow them some headroom to turn profitable.
Deregulation is also something that good economics dictates. But the government has had a great deal of difficulty in accepting it. After all, by deregulating, it will have to take care of a worsening inflation situation. But on the positive side, it will ease the fiscal deficit situation. It will help the public oil companies and encourage greater participation from the private sector.
Given the pros and cons, we believe that the government might partially lift control. It could free petrol prices but be more cautious about diesel. Only time will tell how far the government will go in rationalising the system! Whether politics will trump economics, again?