India’s government on Saturday lifted diesel price controls and raised the cost of natural gas, giving market forces greater sway as it seeks to attract energy investment, boost competition and cut subsidy costs.
The decisions marked an acceleration in reform measures by Indian Prime Minister Narendra Modi, who won a landslide general election victory in May and was buoyed by a strong showing in two state elections this week.
Lower prices of diesel and a smaller-than-expected rise in local gas rates are set to help Modi fulfill an election pledge to curb inflation and pull India’s economy out of its longest slowdown since the 1980s.
“Like petrol, pricing of diesel will be market determined,” Minister of Finance Arun Jaitley told a news conference after Modi chaired a Cabinet meeting.
A liter of diesel was scheduled to cost about 5.7 percent, or 3.37 rupees (US$0.05), less for consumers from yesterday, while prices of locally produced gas are set to go up by a third from next month.
The first cut in gasoline prices across in more than five years, triggered by falling global oil prices, should help further ease inflation that is already tracking lower.
A fall in global oil prices, down more than 20 percent from this year’s June high, means that ending costly diesel subsidies could save the government money without hurting consumers.
India imports more than 70 percent of its oil needs and every US$10 a barrel fall in prices lowers retail inflation by 0.2 of a percentage point and wholesale inflation by half a point, experts estimate.
Diesel deregulation is set to significantly reduce subsidy payouts by Oil and Natural Gas Corp, GAIL (India) Ltd and Oil India Ltd.
These companies sell crude and refined products to state refiners at discounted rates to partly compensate them for losses on fuels sales at regulated prices.
The move to market-based pricing might boost the role of private players like Reliance Industries and Essar Oil in India’s retail arena.
Such companies do not receive federal support for selling diesel at discounted rates and currently sell via state refiners despite having their own sales infrastructure.
“This will create competition in the market and will benefit consumers, government ... and help upstream companies invest more funds for exploration,” Essar Oil managing director L.K. Gupta said.
The government has reworked the gas pricing formula approved by the previous government and restricted the rise in local gas prices to US$5.61 per million British thermal unit (MMBtu) from Nov. 1.
The prices are set to be revised after every six months.
The previous government had suggested raising domestic gas prices to US$8.4 per MMBtu from US$4.20 per MMBtu.
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