Diesel decontrol is a far cry, but it is moving ahead
With petroleum minister Veerappa Moily not saying anything about whether the government will raise prices of diesel—the Kirit Parikh committee recently recommended an immediate hike of R5 per litre—it is difficult to see how his stated goal of decontrolling diesel in the next six months can add up. It is true that the rupee rising from 66.57 to the dollar in September to 63.06 in November, and the Indian crude oil basket falling from $112.68 to $107.08 in the same period, has reduced the under-recovery in diesel from R12.12 per litre to R9.69 per litre. But, with the US economy recovering and the taper expected any time, it is not the most prudent policy to expect the rupee to strengthen to the 54-levels it was in May when per litre diesel under-recovery was just R3.73 as compared to R9 at the beginning of the year. Indeed, were the rupee to weaken further, the per litre subsidy can only rise.
That said, there can be little doubt that while the monthly per litre under-recovery numbers are worrying—11 months after the diesel decontrol began, per litre under-recoveries are up marginally, from R9.03 in January to R9.69 today—there are underlying trends that are encouraging. In an ideal situation, as Parikh has pointed out several times, there is a case for a sharper hike in most fuels since per capita incomes have risen by much higher amounts. But the danger of doing big one-time hikes is that they tend to unravel if the political opposition gets too strong, and it will certainly do that during a pre-election period of the type we are in at the moment. Of the R2.43 per litre reduction in under-recoveries in diesel between September and November, R1.13 or 47% was due to a hike in prices, and with hardly any protest—a one-time hike of R5 per litre may make the government look good to the pro-reformers, but if there is no hike for the next year, does it really help?
Meanwhile, thanks also to a collapsing economy, diesel consumption has been falling almost every month—for the January to October period this year, diesel sales rose just 0.24% over the same period last year and demand for LPG rose just 0.31%. But the fall is not related just to slowing growth since, during this period, petrol demand rose 8.7%. Also, while the economy is growing at roughly the same pace it grew in FY13, diesel demand rose 9.8% between January and October 2012 and LPG by 4.7% over the same period in 2011. In other words, there is little doubt the baby steps approach to diesel decontrol—used very effectively, it is interesting to note, by the NDA when it came to kerosene—are working. If the rupee collapses again, diesel subsidies will naturally rise, but it is worth keeping in mind that while diesel subsidies were 58.6% of the total for the sector in FY12, this is down to 46.4% in H1FY14, with the share of both kerosene and LPG up sharply by 3.4% and 8.9% respectively. It’s time to put in place a periodic small hike in prices in these two commodities as well.