India’s decision to end government control of diesel fuel prices will save the government billions of dollars which can be better spent on more pressing needs such as building schools, roads and ports, analysts say.
India announced over the weekend that it would end a decades-old policy of controlling the retail price of diesel fuel. Providing diesel at below-market rates cost the government about $10 billion last year, hampering India’s ability to spend on other things.
The government had given up control over the prices of gasoline back in 2010 but had continued to regulate prices of diesel – the primary fuel used in trucks and tractors as well as for running generators used to power irrigation pumps.
“It shields the government’s finances from volatility in global oil prices, because of which the subsidy bill often went up,” said Radhika Rao, an economist at DBS Bank.
HSBC estimates that the diesel deregulation will drop fuel subsidy bill to around 0.4% of gross domestic product, half of the 0.8% of GDP it paid last year.
“Our estimate is that over the next few years, fuel subsidies should remain contained,” said Prithviraj Srinivas, an economist at HSBC.
Diesel subsidies cost India close to $50 billion over the last five years, economists say. If India sticks to its guns and lets fuel prices meander with global markets, it will no longer have to foot that kind of unproductive expense. Instead, it can now choose to lower its fiscal deficit or spend more on infrastructure development or social development programs.
Analysts say the government’s fiscal deficit target of 4.1% of GDP this fiscal year – a level that many analysts had thought optimistic – now looks within reach.
via Diesel Deregulation Frees Up Billions for India to Spend More Wisely – India Real Time – WSJ.
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