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October 20, 2014

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India unveils biggest reform of fuel sector

INDIA freed diesel prices from government control yesterday while raising natural gas tariffs in the biggest-yet reform by Prime Minister Narendra Modi’s government, as it aims to boost the country’s economy and overhaul its energy sector.

The diesel move targets one of India’s costliest grants for one of the world’s dirtiest fuels.

Those subsidies — meant to help poor farmers using diesel-powered water pumps — inadvertently led the country to consume more than four times as much diesel as petrol, at large cost to the national budget. Almost half the country’s US$23 billion spent on fuel subsidies last year went to diesel, said the Delhi-based National Institute of Public Finance and Policy.

Meanwhile, India’s trade deficit has ballooned, reaching US$14.3 billion in September, thanks to years of high international oil prices and a dependency on petroleum-based fuels like diesel, kerosene and gasoline for 22 percent of its entire energy consumption.

While India began tweaking diesel prices last year and rolling back some subsidies, the decision to fully deregulate diesel now appeared timed to a sudden drop in global oil prices last week, easing the burden on Indian consumers. Diesel prices yesterday, the first day of the new fuel regime, were slightly lower than a day before in major Indian cities like New Delhi, Mumbai and Kolkata.

“It was a very good time to push this through. It was obviously a tactical step,” said economist Abheek Barua at the Indian Council for Research on International Economic Relations, a New Delhi think tank.

Delhi-based writer and economics commentator Gurcharan Das suggested Modi also needed to better explain the benefits of deregulation to the people.

“Here’s a country that gives enormous political and religious freedom, and yet we have so much difficulty giving economic freedom that reforms have to be done by stealth,” Das said. “Modi needs to get out and sell the idea of the market, the fact that price control is harmful in the end for the people.”

Modi has pledged to both boost India’s economy and provide power to the entire nation within five years — an enormous challenge with at least 300 million Indians still with no power at all, and hundreds of million more lucky to get a few hours a day.

As part of the fuel reforms, India also raised natural gas tariffs by 33 percent to US$5.61 per mmBtu (million British thermal unit) to boost incentives for exploring and drilling.

Finance Minister Arun Jaitley asked state governments to reconsider taxes “so that consumers are not affected by the price rise.”




 

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