Impact and Effect of Deregulation of Fuel prices -

Sunday, August 15, 2010

Impact and Effect of Deregulation of Fuel prices

The government of India has deregulated (free from Govt. control) fuel prices. Petrol and diesel prices will now be market-driven (Prices will rise and fall in step with the international prices) as the government seeks to reduce its budget deficit and help state-run marketing companies cut losses on selling fuel products at state-set prices, whereas the government will continue to subsidize LPG.

It is not total deregulation of fuel prices by Govt., has reserved the option of intervention in case of excessive rise or volatility in global oil prices, which are to decide auto fuel prices now. To put both diesel and petrol prices on a float, prices will rise and fall as with the international prices. For diesel, Govt. will still provide per litre subsidy, to keep the domestic retail price below market level. Here more important is that there will no longer be a fixed price.

There is no such information after how much time prices of petrol will change say every month, every week or a fortnight etc. It is rather difficult to have a precise view of the effects, unless there is more clarification with respect to sameIndia's reform of petroleum pricing is likely to have significant effect:

Increase Inflation - Undoubtedly, with the increase of fuel price, certainly the prices of commodities will go up, in short term we will experience rise in overall inflation. The inflation will drop significantly with the demand and supply equation in long term.

Higher Interest Rate - Higher the inflation, higher the cost of borrowing that will result in higher interest rate.

Reduce Budget Deficit - As this would reduce the share of subsidy burden. Hence, it will cause the fiscal and revenue deficit to decline.

Increase Margin of Oil Companies- The public sector oil companies incur huge amount of loss by selling these products at below market rates. The government compensates these public sector oil marketing companies for some of their losses. Now with this new reform these companies will able to provide product as per the market level prices.

Good quality of oil and variety- Deregulation of fuel prices will lead to good quality fuels and verity of fuels due to increase competition from private players.

Impact Deregulation of fuel prices on Consumers or Common People

It is a double edged sword to consumer. In case price of fuel rises the common man will suffer, In case the prices fall the benefit should be surely passed on to the public gracefully. A rise in fuel prices implies a rise in the cost of everything without any increase in salaries or income, the common man will loose out of it. Later, in long run it is expected that the demand and supply factor stabilizes prices or say competition would bring down the prices or say there is a fall in the international fuel price for considerable period of time the common people will benefit and remember, it is not total deregulation of fuel prices by Govt., the government has reserved the option of intervention in case of excessive rise or volatility in global oil prices which are to decide auto fuel prices now.

Impact on Public Sector on Oil companies
Public sector oil companies is going to be major beneficiaries, With crude prices at around USD 75, this move will reduce the under-recoveries burden from Rs. 770bn to Rs. 530bn as per the research. The companies were expected to lose a whopping Rs 1,10,000 crore this year.

It will open the gates for the private retailers such as Reliance Industries Ltd. and Essar Oil. It is expected to ease off the pressure on resources of the PSU's oil marketers and will allow them to redeploy manpower and operate infrastructure such as terminals, depots and pipelines more efficiently. The re-entry of private firms will also bring back to life their idle infrastructure, built at huge investments. This will take off pressure on state facilities, though they are sure to lose market share. However, even at a lower market share returns on their investments will be much better.

Impact on Private Players
Deregulation of petrol prices has cleared the entry for private fuel retailers, that had become oblivion a couple of years ago when international crude prices skyrocketed to touch $150 a barrel. The Govt. provided subsidy to its own companies but it is not the case for private firms. Private players could not compete against the government-capped price being offered by the public sector firms, Reliance Industries and Shell had shut down most of their petrol pumps some years back, While Essar has continued to operate. With this new reform, private retailers may be able to offer cheaper rates since they have no such problem of location or manpower and enjoy the advantages of new technology, more efficient operation and competitive sourcing of crude.

Do you also believe there is a need to deregulate the fuel prices in India? or Govt. should regulate the fuel prices?
It is an important step in making India a more efficient, global player. Indian economy is growing day by day, so the demand of fuel will increase and if the fuel price is not deregulate now the burden of subsidy will increase and the loss of PSU's will aslo increase. The burden of subsidy finally passes on common man only indirectly. Either, better to deregulate the fuel price or control on usage of fuel

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