Inefficient fuel subsidies to end in India

The Prime Minister’s top economic adviser said that the retail fuel prices will not be controlled by the government and instead it will be linked to the global crude oil price variations. It seems to be good move at present situation when the crude oil is just over US$45 a barrel and inflation at a 10-month low of 6.38% as on the week ending on December 20, 2008. It is likely that the government may declare a further cut in petrol and diesel prices for the second tome in a month. Good for the consumers.

The oil price was over US$140 in July 2008 and the state-owned crude oil refiners were selling the fuel below the cost. The government is subsidizing the fuel prices so that consumers are not made to pay the higher fuel prices when the crude oil price sky-rocketed in mid-December last year. India’s 75% of the energy needs are met by oil imports and the burden on the government is too much in this inefficient system of subsidies. The government also needs to address the concerns of the oil companies with shrinking profits and downgrading of the credit ratings. De-linking of the oil pricing mechanism from the government pricing control seems to be good policy move.