Is Fluctuating Diesel Price Better than Keeping it Static?

Abstract

Government of India under the leadership of Prime Minister Manmohan Singh was mulling to deregulate petroleum price but was not able to implement it looking to the coming election in early part of 2014. He accepted the recommendation of Swaminathan S. Ankalesaria Aiyer. Swaminathan wrote an article in the Economic Times on 02.01.2013. He discussed one research outcome which could mathematically prove that the diesel price hike would affect the common man less than keeping it at a constant price. The research argued that budgetary provision of Rs 2000 billion in 2013-14 would increase the fiscal deficit beyond manageable limits. To cover the gap, dollar borrowing would bring down rupee value leading to costlier imports and inflation. If the losses borne by the Oil Marketing Companies (OMCs) in India were not covered, it would lead to depression; diminish money supply, reduced industrial production and employment. To come out from the trap, the safer option would be, according to Swaminathan, to increase diesel price slowly in installments. On global cues of continued sub-$100 per barrel of petroleum crude, the newly elected Narendra Mody Government deregulated the diesel price from 18.10.2014. This paper aims to discuss the benefits of price stability for the common man and argues to go back to the administered price mechanism (APM) days so that neither the consumer nor the refiner would be in the losing side. The paper tries to show that the Government of India would not have to make budgetary provisions towards fuel subsidy which would be likely to push up inflation.