The time for a hard decision has come. It’s now or never!

Last year, when the government decided to hike the fuel price by Rs 5, one of its important allies deserted it in the name of the common man. Politicians started appearing on national television saying “Yeh Aam Aadmi ki Sarkar nai hai” and pressed for a rollback in the diesel price. Many parties declared bandhs.

On the other side, a wave of happiness spread in the market as many saw it as a bold decision to revive the sluggish economy. Especially the economists, who believed that this sent a sign that reforms would continue despite the calls against it from national and regional parties. This also helped to regain the lost confidence of investors.

The government in January 2013 decided to raise diesel prices in small installments of 50 paise every month and the losses on the diesel were just about Rs 3 in March 2013. However, rupee depreciation in the coming months meant that the losses on diesel climbed back to Rs 10.

Would the economy have been in a better situation if there was one more steep hike in diesel price ?

Increase in diesel prices do affect the common man but only to a certain extent. A one-time diesel price hike can increase the transportation cost for essential commodities and might result in higher inflation for some weeks. But one day or the other the government has to deregulate the diesel prices, so why not do it now? India’s total fuel-subsidy cost in the financial year ended March 2013 was 1.6 trillion rupees. However, if oil prices increase, India may suffer even more, because the cost of subsidies will start consuming even-larger amounts than their allocated budgets.

There are many forms of subsidies doled out by the government such as farm, fuel and food. Subsidies are expensive for governments, and instead of benefitting consumers directly, they take away a possible investment in infrastructure, education and health care, which would help the poor directly and create more employment opportunities. Subsidies have been more beneficial to the rich, who consume more energy. The country’s poor and middle class do not drive around in diesel cars. It is the affluent segment which enjoys the pleasure of having luxurious cars whilst enjoying subsidised fuel from the government.

Infact, the richest 20 percent of households receive around six times more in fuel subsidies than the lowest 20 percent.

Many argue that the hike in diesel prices will increase the cost of farming. But they forget that most of the farmers do not even have tractors and pumps which require diesel. State transportation systems which consume diesel in bulk quantites do not get subsidised diesel. Isn’t it ironical that public transport does not get subsidised diesel when it is used most by the common man of the country. How does diesel subsidy helping the common man still is a big question ?

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