The government hiked diesel prices by a steep Rs 5.62 per litre and restricted the supply of subsidised cooking gas to 6 cylinders per household in a year. We try to understand the economic compulsions behind this decision:
Reason 1: Reeling under the criticism of a policy paralysis and facing an urgent need to cut down the ballooning oil subsidy of Rs 187,127 crore, the government was forced to bite the bullet. The fuel subsidies account for 32 per cent of the country's fiscal deficit - diesel being the main contributor.
Source : AFP
Reason 2: Even after the hike and restrictions on LPG, the government will be left with an under-recovery of Rs 167,000 crore this fiscal which is more than Rs 138,541 crore of2011-12. Last year the government spent over Rs 80,000 crore in subsidising diesel, kerosene, LPG and petrol.
Source : AFP
Reason 3: The hike in diesel price is still short of Rs 17 a litre increase required to make rates at par with its production cost. This year the govt has already finished the 43,000 cr rupees it has allocated for subsidising fuel.
Reason 4: Of the Rs 5 per litre hike, only Rs 3.50 would go towards reducing the deficit and Rs 1.50 would be pocketed by the government as additional excise duty. Hence, this move will contribute in reducing the government's subisdy burden.
Reason 5: The hike in diesel prices will also give Reserve Bank of India (RBI) the room to cut the interest rates. The decision also sends a message to global investors that India is serious about reforms.
