Diesel deregulation takes a backseat

The diesel price deregulation may take a backseat for now with current spike in inflation and possibilities of international oil price hike looming large following unrest in Iraq.

According to officials close t to the development, the government has already decided to go ahead with deregulating the diesel price and thus curbing down the subsidy burden.

However with current inflation hovering above 6%, primarily due to rising prices of essential food items like vegetables, fruits and cereals, official sources are of the view that the timing is not ideal for such a move.

“Diesel price has a spiralling effect and an increase in diesel prices will multiply the impact of price rise and finally the inflation”, they added.

Besides domestic food price linked inflation, another worry for the government is the expectation of further rise in crude oil prices.  The industry has estimated that if the turmoil continues in Iraq, the oil prices may go up further by $15-20 a barrel from current high levels of $113 per barrel.

Reportedly it was estimated that a 50 paisa increase in diesel price will cut the subsidy on this account by Rs 5,000 crore.

India imports about 25 million tonnes of oil from Iraq each year. India's bilateral trade with Iraq stood at $19.4 billion with imports contributing to $18.5 billion while exports were $0.9 billion in 2013-14.

India's exports to this West Asian nation consists mainly cereals, machinery, iron & steel, pharma, meat products and ceramics. Iraq is the second-biggest oil exporter in the 12-nation Organization of Petroleum Exporting Countries (OPEC) bloc after Saudi Arabia.

According to official sources, deregulation of diesel price will trigger further rise in inflation. On one hand, the government is taking several measures to tame inflation. On the other hand, deregulating diesel prices will be counterproductive to the effort.  Therefore one should wait for a more conducive period, they said.

In order to tame inflation, the central government have asked the state governments to crack down on hoarders and reimposed a minimum export price (MEP) on onion to discourage exports. It proposes to impose MEP on potato export as well soon.

It has also asked states to delist certain items, which are usually procured through Agriculture Produce Marketing Committees, so that they come into the open market. With regard to pulses and edible oil, states will be given a line of credit to directly import them to meet local demand.

Further the government is closely monitoring prices of 22 commodities.