India frees diesel prices

India frees diesel prices

NEW DELHI: India has freed diesel prices from state controls and pegged them to international rates, signalling Prime Minister Narendra Modi's resolve to rein in subsidies and one of Asia's widest budget deficits.

The cabinet on Saturday decided to scrap the curbs, Finance Minister Arun Jaitley said at a briefing in New Delhi.

The removal of price caps meant to keep the fuel affordable for the poor comes about a month after central bank chief Raghuram Rajan urged Modi to "seize the moment" as inflation slowed to a three-year low and Brent crude traded near the lowest since November 2010.

The move follows through on a pledge by Modi to take tough steps to revive Asia's third-biggest economy after winning India’s biggest electoral mandate in 30 years in May. Coming on the heels of elections in two states, where exit polls signal a victory for Modi's Bharatiya Janata Party, the decision will help state refiners improve their cash flow and cut debt.

"It's good all around — for the refiners and for the government’s budget deficit," said Alex Mathews, an analyst at Geojit BNP Paribas Financial Services Ltd. "It will be good for the share prices of refiners."

The drop in crude oil prices this year has made diesel cheap enough to be sold without subsidies from the government and state-owned explorers including Oil and Natural Gas Corp. Deregulation ensures that the government won't have to pay to subsidise the fuel again if crude prices rise.

Diesel in India — used by vehicles to backup power generators and agricultural water pumps — accounts for 43% of petroleum consumption. Modi's predecessor had already begun eliminating controls on petrol prices in 2010 and last year started increasing diesel prices by 0.5 rupees a litre each month.

Brent crude has declined 38% from the record high of $147 a barrel it reached in 2008, helping cut costs for a country that depends on oil imports to meet more than 70% of its energy needs.

"Deregulating diesel prices is an economically wise move as not only did the government pay a subsidy on it, but also there was wasteful usage due to artificially low prices," said Rupa Rege-Nitsure, chief economist at state-owned Bank of Baroda in Mumbai. "It is also a politically neutral move as all future governments stand to benefit."

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