DEREGULATION OF FUEL

PRICES IN INDIA

By: Team 1, MBA (Finance & Banking)1. Chetan Anand2. Himanshu Pandey3. Kingshuk Bangabash4. Kumar Anand5. Mitesh Lalwani6. Manish Ranjan Singh

Facts and Figures:• India’s Crude Oil:Requirement: 245.87 MMT Per Year.Production: 73.76 MMT Per Year.Import: 172.11 MMT Per Year.• We are 5th largest importer of Crude oil in the

world, only behind US,EU,CHINA and JAPAN.• The total fuel subsidy in India is INR 1.38 trillion,

which is 73% of the total budget subsidy.• Crude oil imports account to 80% of the total

imports bill of India.

Contents:• What is Deregulation ?• Why Deregulation ?• India Crude Oil Scenario.• International Crude Prices.• Impact of International Crude Prices on India.• Deregulation must balance three key, often

competing, priorities.• Economic Impact of Rise in Oil Prices.• Impact of Deregulation on Domestic Market.• Conclusion.

What is Deregulation ?

• Partial removal of government control.

• Withdrawal of state interference.

• Encouraging free market operation.

• Simplification of government rules and regulation.

Why Deregulation ?• Under a regulated environment, prices are not

allowed to rise and fall with market levels so when

price goes up, the government has to subsidize the

difference between the old and the new price.

• Regulation requires massive government subsidies to

keep oil retail prices low. Our National Treasury

simply cannot afford this.

India Crude Oil Scenario :

*Huge gap in Consumption vs Production.

* Crude oil is imported to meet this gap.

International Crude Prices:

Impact of International Crude Prices on India:

Deregulation must balance three key, often competing, priorities:

Economic Impact of Rise in Oil Prices:

• Rise in cost of imports.

Every increase of $1 per barrel in Indian crude basket prices pushes

up the annual oil import bill by $1.2 billion.

This is leading to depletion of FOREX Reserve.

• Widening of trade deficit.

India’s trade deficit stood at 180.8 billion USD as on September

2012.

Economic Impact of Rise in Oil Prices:• Increase in Oil Under Recoveries. Contd…

Economic Impact of Rise in Oil Prices:• Mounting of fuel subsidy burden. Contd…

Economic Impact of Rise in Oil Prices:

• Worsening Fiscal Deficit:

India’s fiscal deficit stood at 5.7 % of the GDP.

• Reduced amount for Infrastructure Investment:

India aims to invest $ 1 trillion on Infrastructure development during

the 12th five year plan. Higher spending on crude oil have the

potential to derail government’s plan.

Contd…

Impact of Deregulation on Domestic Market:

• Increase in Inflation Rate.

• Erosion of Profit Margin.

• Hike in Interest Rates.

• CAPEX Postponement.

• Reduction in Credit Growth.

• Fall in Employment Opportunities.

• Slow down in Economic Growth.

Conclusion

• We would like to conclude by saying that deregulation as a policy of GOI is the need of the hour as reiterated by our Prime minister but in the same breath we have to reduce our dependence on fossil fuels and the focus should shift towards renewable energy sources and clean energy.

• This can be achieved by implementing brave measures overcoming policy paralysis of government.