Through a landmark decision taken by a high-level group of ministers, the Indian government has announced the rolling back of subsidies on petrol and other petroleum products.

The government has decided to roll back subsidies on petroleum products and transfer power to decide prices to the oil producing and marketing companies. The oil companies would now, possibly, be able to sell petroleum products according to the international crude oil prices.

Until now the Indian government controlled oil prices through a tool called the Administrative Pricing Mechanism. The APM was a regulatory mechanism that gave the government the right to modify oil prices in order to shield the common people from the fluctuations in the international crude oil prices.

The politics of petroleum in India

This practice, however, made repeated and long-lasting dents in the profit margins of the Indian oil companies. These companies were forced to sell the petroleum products at substantial losses due to this regulatory intervention. The prices were maintained at such low levels that it completely wiped off the presence of private companies in the market. Several private companies closed and sold off their oil filling stations and completely stopped commercial operations.

The decision to reduce subsidies on petroleum products was not an easy one. There have been a slew of price upgrades in the past few months. Earlier this month, the government 'freed' the natural gas prices from regulatory  control pushing prices of compressed natural gas up which in turn led to increased public transport costs.

With inflation, and especially inflation in food articles, edging higher every week the decision can have significant political ramifications. The reason the government decided to go ahead with the deregulation is because general elections are due only in 2014.

Cleaner transport

This de-regularization would possibly make conventional fossil fuels less attractive than the cleaner fuels. Electric and hybrid automobiles could emerge as real alternatives to conventional automobiles.

The market for electric and hybrid automobiles is already heating up in India. Several auto makers including Mahindra & Mahindra, General Motors, Tata Motors and Toyota have either announced plans for launching electric and hybrid cars or have already launched their models. Over the years, with the increase in oil prices relatively cleaner automobiles have gained popularity.

Recently, Mahindra & Mahindra bought stake in the Reva Electric car company and Toyota launched its hybrid Prius model and got highly positive response from the Indian buyers who seem to becoming more and more environmentally conscious. Tata Motors also has several electric cars in its inventory which it could launch in the near future.

While the rolling back of subsidies is a positive stimulus for the market the government needs to do more to promote cleaner transport. Launching electric or hybrid public transport buses would definitely be a significant step in promoting such automobiles. The government needs to build capacity for cleaner fuels such as biofuels and infrastructure for electric cars.

The government increased petrol prices by Rs. 3.5 per liter, diesel prices by Rs. 2 per liter and kerosene by Rs. 3 per liter. The shares of all state owned oil companies rallied up to 20 percent at the Indian stock markets.

Image Credit: Mukesh Gupta/ Reuters. 2010/ PicApp

The views presented in the above article are author’s personal views and do not represent those of TERI/TERI University where the author is currently pursuing a Master’s degree.