Tuesday, May 27, 2008

Deregulation of petrol: Is it for India or not?

Recent news highlights the government's want to decontrol petrol prices, so that the market forces can decide the price of petrol in India rather than the Government. Deregulating means that prices in India will move according to the global oil prices. This may lead to a direct hike in petrol price by Rs 15 or more.

Global oil rates have touched an all-time record high of $135 a barrel which translates into a loss of Rs. 2,00,000 crore on the sale of petrol, LPG gas, diesel and so on because the Government is selling all of the above at subsidized rates. If they sell at the real rates (Rs. 15 app. more), then inflation will rise, income levels with drop, and there will be abject poverty. This being the election year,  UPA(Congress) Government has been caught in a Catch-22 situation where it has 2 alternatives --

  1. Let the price of petrol stay as it is. Due to little or no hedged positions in oil,  Government and state-run oil firms are likely to get a beating, as mentioned before, to the tune of Rs. 2,00,000 crore.

  2. Increase prices of petrol to avoid losses. This transfers all the heavy cost onto the consumers. Consequently inflation will rise, prices will skyrocket, and there will be a sorrow state. Being the election year, these voters are going to vent their frustration by voting against congress led UPA Government.

The Finance Ministry recently declined Petroleum Ministry's request for lowering customs duty on:

  • Crude Oil to 0% from 5%

  • Petrol/Diesel to 2.5% from 7.5%

This gives the indication that the above move may be followed after all.

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