It is not all gain and no pain. The Centre on Saturday gave the country a Diwali gift with a rider. It deregulated diesel prices, which will bring down inflation to an extent since transport costa will come down, but raised natural gas tariff by 46 per cent that will push up fertiliser, power, CNG and PNG rates.
Diesel rates in the city will come down by Rs3.72 a litre from October 18 midnight and will move in tandem with international cost from next month. This will be the first reduction in diesel price in over five years. It was last cut on January 29, 2009, when it was reduced by Rs2 a litre.
Taking the bold step to deregulate diesel prices, thanks to a favourable environment when crude oil prices are falling internationally, the cabinet committee of economic affairs (CCEA) chaired by PM Narendra Modi asked oil marketing companies to let the market determine the price.
Against the backdrop of the steep doubling of rates to $8.4 per metric million British thermal unit (mmBtu) recommended by the Rangarajan Committee and cleared by the previous UPA government, the government approved a 46 per cent increase in natural gas prices that will go up from current $4.2 mmBtu to $6.17 per mmBtu from November 1.
Finance minister Arun Jaitley said the price was "sufficient incentive for drilling and investment" while at the same time " it would not excessively burden consumers”.
The increase in natural gas price will result in CNG prices going up by Rs4.25 per kg and piped cooking gas by Rs2.6 even though oil minister Dharmendra Pradhan said states are being impressed upon to cut taxes to reduce the burden.
Besides, tariff for power produced from gas will go up by about 90 paise per unit and fertiliser production cost by almost Rs2,720 per ton. Jaitley said the new gas price hike will be effective prospectively and will be revised on a half-yearly basis.
Dispelling doubts on Reliance, Jaitley said the revised higher price will not be applicable to the KG-D6 gas basin, where RIL is the contractor, till the outcome of the arbitration proceedings.
The removal of the diesel price caps meant to keep the fuel affordable for the nation’s poor comes about a month after RBI governor Raghuram Rajan urged Modi to “seize the moment” as inflation slowed to a three-year low and Brent crude traded near the lowest since November 2010.
The drop in crude oil prices this year has made diesel cheap enough to be sold without subsidies from the government and state-owned explorers, including ONGC. Deregulation ensures that the government won’t have to pay to subsidise the fuel again if crude prices rise.
Transport experts said the cut in diesel prices would bring down transport rentals in the range of 3-5 per cent. The final benefit to be passed on to consumers will be decided by the states, depending on the various duties and taxes.
This deregulation of diesel prices would facilitate greater competition and enhanced efficiency in service delivery of the oil companies. This is expected to benefit consumers due to greater competition among oil companies, said Jaitley.
Welcoming the decision, the MD and CEO of Essar Oil said: “Diesel deregulation will bring the private OMC retail network into system. This will increase competition, benefiting the end consumer.”
‘‘Deregulating diesel prices is an economically wise move as not only did the government pay a subsidy on it, but also there was wasteful usage due to artificially low prices,” said Rupa Rege-Nitsure, chief economist at state-owned Bank of Baroda in Mumbai. “It is also a politically neutral move as all future governments stand to benefit.”
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