Economic Survey 0809 - Decontrol petrol, diesel prices and reforms in energy sector

The Economic Survey was tabled in the Indian Parliament and is a pre cursor to the Budget. The Finance Ministry presents the Economic Survey in the parliament every year, just before the Union Budget. It is the ministry's view on the annual economic development of the country. We will list out the important measures that have been recommended in the survey in a series of posts. The information consists of both facts announced in the Survey and their analysis picked up from a range of sources. The first Economic Survey – Part1 discusses the survey’s recommendation of deregulating the oil prices in India.

Petrol Prices

Even while the opposition protests against the recent price hike by the government of Rs.4 per litre in petrol and Rs.2 per litre in diesel, the economic survey says the opposite. It says that the entire hike in the global oil price should be passed on to the consumers for petrol. For diesel, the survey recommends that until the crude oil price reaches $80, it should not be regulated and state oil retailers should have the freedom to fix the prices.

Currently government of India controls the petrol price in India. So whatever is the global oil price, it is government’s decision if that want to change the petrol price in India.

Why should the government decontrol the prices?

The Economic Survey says that if there the government does not increase the petrol price even though the price is global market has increased, then, the demand will continue to grow causing the global price to increase even more because as the economic principle goes, an increase in demand will increase the price. This results in wasteful expenditure subsidized by the government and big losses for the oil companies which are again bailed out by government with public money.

Where as in a free market, if the global prices are high, the demand should fall and bring the price down again.

Diesel is commonly used by the farmers in agriculture (used for pumps and irrigation) and trucks and hence impacts the poor. So it is prudent to control it after a threshold level to protect the poor. Diesel is also used by rich who own cars and a subsidy in diesel end up subsidizing the rich.

The survey thinks that this is the right time to take a decision as the global prices are moderate and the domestic inflation is also low.

Other reforms in energy sector

• Limit subsidised cooking gas to domestic consumers to 6 to 8 cylinders.
• Phase out Kerosene supply-subsidy by ensuring that every rural household (without electricity and LPG connection) has a solar cooker and solar lantern.
• Survey also suggested the sale of old oil fields to private sector for application of improved oil recovery techniques.