Impact of Fuel Price Deregulation in India Essay Example

would have decreased from O to 02 to decrease prices. However, government subsidies prevent this from happening and result in inflation.

The government aims to reduce its high fiscal deficit by deregulating, currently at 4.12 trillion rupees or 6.5% of the country's GDP. This decision is expected to lower the projected fiscal deficit from 5.5% of the 2010-11 GDP and create additional revenue for other programs. However, despite the economic reforms implemented in 1991, successive governments have shown little inclination to significantly curb the fiscal deficit.

To achieve a fiscal deficit of 4% of the GDP in fiscal year 2011 and generate revenue, the government plans to implement fuel price deregulation and conduct a 3G auction. Fuel subsidies make up a quarter of the estimated subsidy bill of Rs 1.2 lakh crore ($25.5 billion). Prior to this announcement, oil companies were projected to face losses amounting to $24.4 billion this year based on an average crude price of $85 per barrel.

Furthermore, comparing Indian crude oil prices with fuel product prices shows a steeper increase in crude oil prices (Annexure: Chart-I).

The fiscal deficit has also been impacted by this situation. The formula to comprehend how the fiscal deficit will decline in the long term is as follows: Y represents GDP or National Income, C stands for Private Consumption Expenditure, l denotes Private Investment Expenditure, G signifies Govt Expenditure on Consumption and capital formation, X corresponds to Export, and M represents Import. Additionally, G equals Taxes minus Subsidies minus Govt. Expenditures. In India, G currently stands at a negative value of 4.12 trillion rupees, indicating that the government's tax revenue is lower than its expenses incurred. By reducing

subsidies, the government can increase its savings which can be utilized elsewhere. However, eliminating subsidies might lead to an increase in private consumption and a decrease in private savings; nevertheless, this won't affect the fiscal deficit since it is determined by the government's income (taxes) subtracted from its expenditures. State-owned retail oil market firms like Indian Oil Corp Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp face a threat of losing their market share.

Regarding the impact on oil exports, the rise in domestic sales for Reliance could lead to a decrease in exports as they choose to capitalize on the more profitable domestic market. As for the effects on private oil retail firms, currently, the government has only disclosed gasoline prices, which make up approximately 10% of the oil products sold in India. However, diesel is actually more lucrative as it accounts for over a third of oil consumption in India, primarily used by trucks, buses, and increasingly by cars. Once the deregulation of diesel prices occurs, private firms will accelerate their retail expansion efforts.

One example of a company expanding its retail network is

Essar. They plan to increase their retail network from 1,342 to 1,700 by the end of March. This expansion will have an impact on the bond market as oil companies typically issue bonds to borrow money from the corporate bond market for financing working capital deficits caused by decreased fuel sales. However, as oil companies regain lost revenues, they will have more cash reserves and therefore need fewer bond issuances. It's important to note that oil companies play a minor role in the corporate bond market, accounting for only $1.1 billion out of a total market value of $22 billion. Additionally, political factors may also be influential.