An action packed week that it was, the Modi government did release slew of measures for the week gone by. Several important decisions were taken at the end of last week. Particularly dealing with the petroleum products and the energy sector! While the equity markets may be enthused by these, the reforms are still half way. Allow us to delve more on this...
Last week a new formula for pricing natural gas in the domestic market was determined; the decontrol of diesel prices was announced; and the scheme that directly transferred subsidies to bank accounts of users of liquefied petroleum gas (LPG) cylinders was modified and re-launched. That indeed was lot. And perhaps in the right direction! However, they are not foolproof. And a follow-up action is required on the government's part.
The fiscal deficit is a trouble looming large for Indian economy is not new. And the massive subsidies for the petroleum sector have swelled the fiscal deficit to alarming levels. Hence, the recent governmental efforts to reduce the subsidy burden by decontrolling diesel prices and modifying the LPG subsidy outfit is on the right track. However, whether or not it gets implemented and achieves under lying objective is yet to be seen. While it is easy to announce this reform now when crude prices are low, implementing a hike in case crude prices go up will really give more insight into the matter. As we all know, petrol despite being a deregulated commodity was not allowed to be priced freely by oil companies. When it comes to fuel price control, we believe the government should focus on rationalizing taxes in the sector and should completely distance itself from pricing decisions, leaving the same to oil companies. Only if the individual oil companies use price movements to compete with each other, it would imply that the market-based pricing mechanism is in place.
There will be certain implementation issues with gas prices as well. While the good part is that the problematic elements in the formula for pricing natural gas have been rectified, but a price hike is expected to lead to spike in costs harming the downstream user industries, such as fertilizers and power. These fertilizer industries have prices that are not yet freed. And unless that happens, this gas price increase will continue to inflate the government's subsidy bill. Also the upward gas price revision will add to the costs of gas-intensive industries. Hence, while the intention to bid to attract investments into gas exploration is noble, implementing it will come across with its own set of challenges.
And lastly, reworking on direct benefit transfers, or DBT, for LPG cylinders is not up to the mark. The government needs to take a call on the gradual reduction of LPG subsidy in a phased manner which in turn will aid in reducing the fiscal burden.
The aforesaid factors clearly tell us that a guaranteed approach is yet to be put in place particularly to build-up fiscal prudence. While the Street might rejoice the recent moves, we await a further clearance on these issues and remain hopeful of not being disappointed.