Expert Zone

Straight from the Specialists

The enigma of diesel prices

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(The views expressed in this column are the author’s own and do not represent those of Reuters)

Budget considerations make it necessary to raise prices of diesel; political exigencies make that difficult. No wonder Chief Economic Adviser Kaushik Basu was cautious enough to suggest ‘partial decontrol’. But the present is the time to do more than that.

Diesel prices were last increased in June 2011. With the current administered price, marketing companies are forced into under-recoveries which now amount to over 9 rupees per litre. Not all under-recoveries are subsidies. The government funds the major part with oil companies absorbing the balance. Call it whatever but there is an outflow of cash from the government.

The planned under-recoveries keep the price of diesel deliberately low. Diesel is 20 percent cheaper in India than in Pakistan, 27 percent cheaper than in China and 34 percent cheaper than in Brazil. This under-pricing of diesel has resulted in two major undesirable consequences.

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