Diesel Prices : To Raise or not to Raise

The Indian government was planning to increase the prices of diesel several times in the last 6 months. And as the cookie crumbles in India, it has remained an illusion for all Indians. The question arises that why has the government thought about increasing diesel prices so often ? The answer 1) Fuel prices are dependent on  International Benchmarks and 2) Our currency has depreciated.

In India the prices of diesel are subsidised by the government and this subsidy bill comes to around Rs. 1 lakh crore. We can't increase the prices because we are a poor country and an increase would increase our already high inflation (currently at 10%, as per official estimates). The main reason that we need to raise the prices is because this subsidy burden is increasing the deficit i.e. the government's income is less than its expenditure, which leaves no surplus to invest in infrastructure and poverty reduction measures. And as we import more than 80% of our fuel our Balance of Payment also gets skewed, this further weakens the rupee.

As our deficit increases the government will have to borrow to pay not only for the subsidy but also for other expenditures, this in turn raises the cost of borrowing for the government. The high deficit rate also dissuades foreign investors from investing further money in a country which cannot balance its books. The low prices create high demand for diesel fuel, as petrol prices have been increased and anything which is not fairly priced will not be used efficiently ( economic basics ). Low diesel prices have also attracted people towards buying diesel cars, hence the government's rationale for subsidising the fuel for the poor doesn't stand.

Any measure such as differential pricing for disparate customers will lead to corrupt practices and also increasing tax on diesel cars will lead to lower demand which will further hurt the fragile economy. So if the government wants to subsidise diesel so that it doesn't create inflation as most of the goods in India are transported via road transport which primarily uses diesel. 

I propose we have dual pricing for diesel not between customers but for large cities and the rest of India. So that we can reduce the burden on the government and the affluent section of society pays the true price of fuel. This duality won't have a major impact on prices of essential commodities but it will curb indiscriminate use of diesel in cities. Those who want to use economical means of travelling in cities can opt for CNG cars or public transport (just hope it gets better).