Policy paralysis ends

India is finally on the road to reforms once again. The Narendra Modi government has lifted diesel price controls and raised the cost of natural gas, allowing market forces greater sway as it seeks to attract energy investment, boost competition and cut subsidy costs. In doing this, the government has boldly bitten the bullet to control inflation, something the country had been awaiting for long. It has left behind the policy paralysis of the UPA II that delayed the move till April and was then asked to put it on hold by the Election Commission.

The deregulating of the diesel price, besides a new gas price policy, ensures that the benefit of LPG subsidy in cash directly reaches the consumers. With that, the Modi government has kept an election-time promise. It places the economy in relative comfort in a higher growth plane. For the Modi Government – doing better than what the previous government could, or could not do – the timing is auspicious. The first cut in diesel prices across the country in more than five years, triggered by falling global oil prices, will help further ease inflation that is already tracking lower. A fall in global oil prices, down more than 20 per cent from this year's June high, means that ending costly diesel subsidies will save the government money without hurting consumers.

Diesel makes up nearly half of India's fuel demand and its usage is set to rise as Modi wants to boost the employment-generating manufacturing sector to generate growth and jobs. India imports more than 70 per cent of its oil needs and every $10 a barrel fall in prices lowers retail inflation by 0.2 of a percentage point and wholesale inflation by half a point.

As for gas, the government has reworked the gas pricing formula approved by the previous Congress-led government and restricted the rise in local gas prices to $5.61 per mmBtu from Nov. 1. The prices will be revised after every six months. About 80 per cent of the additional revenue due to revision in gas prices will go to state-run companies ONGC and Oil India. Lower prices of diesel and a smaller-than-expected rise in local gas rates will help Modi fulfill an election pledge to curb inflation and pull India's economy out of its longest slowdown since the 1980s.

Besides industry, the move helps the auto industry in a big way, since the commercial and public utility vehicles and half the passenger cars are diesel-powered. The car owners can now exercise their preference depending upon whether they want to run within the city or for long distances.

The new gas price brings a finality to the issue and is expected to improve investor sentiment by removing policy uncertainty. It also highlights government's commitment in pushing ahead with tough decisions and would give a fillip to the next round of oil/gas block auction.