The Hot and Sour Diesel

Deisel price is changing the economic and political landscape of the country faster than you can imagine. It is hot and sour for the ruling front, oppostion as well as for the people if the unfolding of the worseing economic environment of the country is an indicator.
A close assessment of the prevailing and emerging economic environment of the country strongly indicate that diesel is slowly coming out of the subsidy regime. At present, diesel has the benefit of a subsidy of around Rs 14 litter. Few months back, one litter of diesel enjoyed subsidy of around 21 rupees compared to petrol.
    In the past, the government resisted removal of diesel subsidy fearing popular outbursts and opposition parties getting a political opportunity out of it. But now, economic compulsions from a slowing economy may force the government to take the risk of downsizing diesel subsidy.
    Estimates are that fuel subsidy bill for the current year may reach Rs one lakh crore. This means that given that the government’s total borrowing is around Rs 6 lakh crore, it has to spend one rupee out of the every six rupee borrowed to finance the fuel subsidy.
    The most important and perhaps the immediate factor which may check the subsidy is the worsening economic scenario. Current indications are that the economy may slow down to 6 to 6.5%  leading to reduced tax revenues especially from corporate tax. Slowing economy is disastrous for the government finances because of declining tax revenues for the government. Hence the government is circumscribed to perform any extravaganza like bearing a high subsidy bill. Undisciplined government finance is a heavy risk for the economy as well as for the people; the example of Greece is enough.
    In the past, rising revenues from high economic growth allowed the government to continue with big subsidies on the feul front. That period of richness has gone.  And  now, more than ever before, the government is not in a position to bear the economic riskand better is to have the political risk of desubsidising diesel. Hence, diesel price may be slowly increased, producing shocks and aftershocks in political circles.
This has resulted in over use of the subsidized diesel. For example, in the passenger car market, customers have migrated from petrol engines to diesel engines.

And more than ever before, the government’s revenue potential is shrinking.