Ever since petrol prices saw the highest ever hike, the future of diesel prices has been on everyone's minds. The country's fiscal deficit is assuming wider proportions on account of fuel subsidies. In such a scenario, raising the prices of petrol (that is used to just a quarter of diesel) and leaving diesel untouched makes little sense. It is true that deregulation of diesel is a hard bullet to bite. More of a common man's fuel, if its prices are increased, it will have a wider impact on inflation levels. While the Government has suggested raising duties on diesel cars, it will hardly be enough to plug the deficit.
So what could be a possible solution? As per Finance Ministry's Chief Economic Adviser Mr. Basu, the best solution under current circumstances will be a partial and controlled deregulation of diesel. On the surface, the suggestion makes sense. This is because holding prices constant will lead to higher subsidies and fiscal deficit. This will lead to further currency depreciation and an indirect rise in costs. The Government will have to finally balance the situation by raising taxes. So why not nip the problem right in the bud by decontrolling diesel prices? But we all know that this is much easier said than done.
The hike in diesel prices will affect a wider chunk of the population, especially aam junta. It needs a very strong political will to go against majority wishes. Add to that the inflation risk. What Government should do is to rationalize taxes, which will solve half of the problem. The other issue is to make sure that the subsidies on diesel flow to the target beneficiaries and people with diesel run SUVs don't make a mockery of the subsidy system. Last but not the least; we do need to link diesel prices to crude prices to some extent. This will lead to people optimizing the use of diesel by giving them the signal that it's just like any other commodity following principles of demand and supply with price playing an important role. As crude prices have softened after a long time, perhaps this is the time for the Government to act. Hope it doesn't miss the opportunity.