Expert in the field of oil and gas and a former member of planning commission Kirit Parikh welcomes the government's decision on diesel prices. He also believes that the government will face less political flak after this move.
"Of course, it is a deregulation with what I call Indian characteristics. It (diesel) is deregulated but they (OMCs) will be sort of guided by the government. But, in a sense, guideline has already been provided," he told CNBC-TV18 in an interview.
Below is the edited transcript of his interview to CNBC-TV18
Q: There is no clarification on what “small” means? What kind of mechanism? As a first up, the fact that the government is finally decided to allow some sort of a diesel price hike - is that a positive you think?
A: I think it’s positive and I see it in the following light. The government had already announced that it is going to increase diesel price by Re 1 per month over the next few months to eliminate diesel subsidy. I think that would be the implicit guideline given to the oil marketing companies.
They would really more or less follow that kind of a strategy. From that point of view, I think this is a good step. Of course it is a deregulation with what I call Indian characteristics that it is deregulated. However, they will be sort of guided by the government, what the OMCs should do. Guideline has already been provided.
Q: This business of saying oil marketing companies are empowered is on paper because that call will be a political one?
A: It was the case in the past and I think, in a sense, diesel would also fall in the similar sort of situation. However, because the government had said that it wants to increase price of diesel by Re 1 per month, I think that perhaps gives a guidance that the government would let the oil marketing companies raise the prices.
Instead of government raising the price every month, if the oil marketing companies raise then I think there is perhaps a little less of political flack that the government might face in this.
Q: It is a call that the government of India has to take on whether OMCs will be allowed to hike diesel prices and by how much.
A: The government has really no choice but to raise diesel prices. The subsidy burden, the under-recoveries have become so large that if you let it continue the oil marketing companies and the upstream oil companies might seriously go under.
One might find that they don’t have enough money, they are not able to buy the oil and bring the oil to the consumers. That would be a far more disruptive and politically damaging situation than having some small and gradual increase in diesel price. Not increasing diesel price is also inflationary.
Q: Oil marketing companies refusing to comment, the orders haven’t been issued yet. What would be the most feasible, the most elegant way of doing this? Do you think a monthly hike of say a rupee would make sense and do you believe that they will go all the way up to Rs 9.60 which is the current recovery on diesel?
A: I would like it to happen that way. Doing Rs 1 per month would be reasonable way of doing it. Not doing anything, letting the under recoveries remain at this level is also extremely damaging to our national economy. High under recoveries lead to more inflation and lower growth rate than if you were to really raise the price of diesel. It is not as if that one has a choice between doing one thing which is good and the other thing which is bad.
The impact on consumers of diesel price increase is grossly exaggerated. We had done a study which showed that if you increase diesel price by 10 percent, that is say Rs 5 then the impact on the poorest consumers in rural and urban India would spend no more than half a percent more of their income. It is less than half a percent of their expenditure will increase. So, this is not a huge burden. People say transport cost would increase but if the economy goes down transport demand would go down. The loss of income that the transporters would suffer may be far worse than the loss of income they might suffer if the cost increase slightly.
Q: If after having taken this decision they were to stop at may be doing a Rs 1 or Rs 2 hike and then put an end to it over there, would that perhaps be the most disappointing thing for you?
A: Yes, it will be a disappointing thing. If the government doesn’t go through atleast significant way in reducing the subsidy in the next few months it would be quite disappointing. My feeling is if it does this gradually it will find that the inflation would not be that high. It might be even lower than not doing anything and you might get a slightly better economic growth as well. So, if they don’t do it, it would be disappointing. It would be really letting short term considerations and irrational fears overtake your rational understanding of the economies functioning.