DELHI – 18 January 2013 – The Cabinet Committee on Political Affairs (CPPA), under the leadership of Prime Minister Manmohan Singh, announced yesterday that it would increase India’s diesel prices, and continue to do so through a series of phased hikes, until the existing INR 9.60 (US$ 0.18) per litre subsidy is eliminated. The CPPA also announced that bulk consumers of diesel would immediately have to pay the full market price plus taxes. At the same time, the capped supply of subsidized LPG cylinders is to be increased from six to nine bottles per year.

According to newspaper The Hindu, the Committee’s decisions were made in response to a set of proposals from the Petroleum Ministry. The Committee did not take a decision on other proposals to immediately raise LPG prices by INR 50 (US$ 0.93) and to eliminate the rest of the subsidy over a two-year period. It also declined a proposal to phase out subsidies to kerosene.

The first diesel price increase took place today, increasing the pump price of diesel by 45 paise (US$ 0.01) a litre, according to newspaper The Times of India. Although the exact size of each subsequent increase is to be determined by retailers, similar increases are now expected every month. The paper reports that this first diesel price rise will save the government INR 21,900 crore (US$ 75 million) every year, though the decision to simultaneously increase the capped supply of subsidized LPG will incur an additional cost of INR 9,300 crore (US$ 32 million).

According to another article in the The Hindu, American bank Merrill Lynch has estimated that the price increases will drive up inflation by about 1.2% in fiscal year 2014.

Petroleum Secretary G. C. Chaturvedi was interviewed on the decisions, commenting that, “Only a small quantum of change has been permitted over a period of time. It cannot even be called partial deregulation.”  Nonetheless, this sets India on the path towards deregulated diesel prices.

The IISD’s Global Subsidies Initiative (GSI), in collaboration with the Delhi-based National Institute for Public Finance and Policy (NIPFP) and The Energy and Resources Institute (TERI), have published a policy brief that provides short- and long-term recommendations for gradually phasing out subsidies for diesel, LPG and kerosene while providing more effective, targeted support for those that need it.

The GSI’s short-term recommendations include reforms that have now taken place: a gradual increase in diesel prices and restricting the purchase of subsidized LPG cylinders per household. The GSI also recommends phasing out subsidies to LPG and kerosene if a suitable compensation scheme can be developed for low-income households, such as a direct cash transfer mechanism. It outlines how such a cash transfer system could be designed.

The series of reports also provide in-depth analysis of the economic impacts of increasing diesel prices for sensitive sectors such as transport and agriculture, and suggest how inflationary impacts could be minimized.

For more information and the full reports, see: http://www.iisd.org/gsi/where-we-work/india