Thursday night's diesel price revision
augurs well for the economy, especially if it is carried through with repeated increases in the coming months.
The government has raised diesel prices in India by 45 paise a litre
(51 paise in Delhi, including value added tax) and reduced petrol prices by 25 paise a litre. The diesel price for bulk consumers such as the Indian Railways has gone up by as much as Rs 11 a litre.
Here's what it will do in the immediate, short and medium term:Reduce fuel subsidies
to the extent of Rs 15,000 crore a year, per calculations by PTI; Rs 3,400 crore is expected to be saved in the remainder of financial year 2012/13.Share prices of oil retailers
will climb and Friday morning trades
already reflect that.Bump up inflation a notch.
The Railways may not do so (perhaps Railway Minister Pawan Bansal
knew of this plan when he announced fare increases for the first time in a decade earlier in January) but be sure that road transporters will hike freight charges. They carry more than 60 per cent of freight traffic in India (double what moves on rail) and are certain to pass on the cost increase to customers.Cap the seemingly insatiable demand for diesel cars.
Especially if a government deep-throat source is accurate when he or she tells reporters that the government intends increasing diesel prices by 50 paise every month
. The subsidy on diesel is nearly Rs 10 a litre currently. Fortunes of petrol-only companies such as Honda, badly hit by the swing in demand towards diesel cars, will bounce back some.Moderate the fisc.
If such periodic increases happen - Yashwant Sinha had started the good practice in his NDA finance minister avatar - and the diesel subsidy of some Rs 95,000 crore is eliminated or significantly reduced, it will ease government borrowing. Or, provide some breathing space for other big bang programmes such as the Food Security Bill. A bunch of ifs here but it's a possibility.Ease interest rates.
The signals are all there that anti-inflationary measures are in the works. RBI Governor Duvvuri Subbarao surely won't expect things to change overnight, but come January 29, when he goes public with the central bank's next monetary policy review, it will be tough for him not to announce some rate cuts.
If I have missed any other effects, post them in your comments below.