Bad times make acceptance of hard decisions a little easy. However, this hasn't been true with regards to fuel prices in India. Despite a huge fiscal deficit and mounting losses for oil refining companies, diesel, that accounts for around 60% of the losses of oil companies, still continues to sell at prices way below the market rates. So much so that it is close to becoming a threat to autogas (CNG) sales, that once enjoyed handsome discount to diesel prices.
The Government's stance on fuel prices has distorted the economy in ways more than one. It is only leading to dieselization of the economy with benefits flowing to people with diesel cars, gensets and SUVs - basically the affluent class. Ironically, middle and lower class people with two wheelers are still using petrol that sells at prices much higher than diesel.
However, inertia has been stretched too far. The entire energy sector seems to have run out of steam because of the retrogressive pricing mechanism. The under recovery losses for the oil firms are expected to touch Rs 1,900 bn for FY13. Not to mention the fiscal deficit, that has led to decline in investments and increase in inflation. As such, the petroleum ministry is planning to raise diesel prices by Rs 4 to Rs 5 per litre post parliamentary session.
This will be a tough test for the Government's political will which is already grappling to defend itself on the coal issue. In India, where reforms are opportunistic and the decisions are driven more by political interests than economic, we believe any kind of optimism with regards to reform is likely to lead to disappointment. That said, the other option here is an economic disaster. The Government may choose to dodge the bullet, but it will do so at the risk of opting for an economic disaster the clock for which is ticking fast.