Gopi Krishnan asked: Is the decision to stop subsidies on Petro-products a leverage to open up Indian markets? Won't this affect the common man adversely?

Shebonti Rad Dadwal replies: There are several factors contributing to the decision to stop subsidies:

1. Oil marketing firms were losing a lot of money as they had to market products at subsidized rates but had to buy crude at international rates.
2. The decision to dismantle the administered pricing mechanism was taken a long time back -- 2001-02, but was only partially implemented at the time and then held in abeyance after international crude prices began escalating till 2007 since it was believed that the fallout would have adverse political implications for the government at the time, since elections were round the corner. Also opposition parties were opposed to a price hike.
3. If India wants to implement reforms and attract investments in the oil sector, a subsidy regime is not conducive to the same.
4. If market forces are to be allowed to play in the Indian oil sector, then it is necessary to provide the private sector a level playing field. Some private companies which had entered the retail sector had closed down their operations due to difficulty in making profits because of the subsidy regime. With the lowering/removal of subsidies, they can now start their operations again.
5. In the short term, higher prices will affect the common man. However, in the long run, it will, or should, lead to more efficient functioning of the oil sector, it will prevent black marketeering, and it will force people to use energy more efficiently.
6. To alleviate the burden on the common man caused by higher oil prices, government could restructure the tax regime on fuels. Taxes comprise some 51% of motor fuels price.