The Indian government announced two important fuel reforms – a deregulation of diesel prices and a hike in natural gas prices – over the weekend, a signal of Prime Minister Narendra Modi's commitment to tough economic reforms.
The price of widely-used diesel was deregulated effective midnight of October 18, while natural gas prices will be raised to $5.61 per million metric British thermal unit from $4.20 on November 1, and revised every six months.
So what are the implications of the fuel reforms for Asia's third largest economy?
Controlling the fiscal deficit
Freeing diesel prices from state controls and pegging them to international rates effectively eliminates the subsidy on fuel. This will lower the government's subsidy bill by around 0.3-0.4 percent of gross domestic product (GDP), DBS estimates, and shield the government's balance sheet from volatility in global crude prices.
The government's fuel subsidy bill was about $11 billion in the year ended in March, around half of which was for diesel. Diesel accounts for around 44 percent of total fuel consumed in the country.
"The fuel reforms bode well for the fiscal outlook," said Sonal Varma, chief India economist at Nomura, noting that with both diesel and petrol prices now market-determined, the government will subsidize only liquefied petroleum gas (LPG) and kerosene.
India's fiscal deficit was 3.98 trillion rupees ($64.4 billion) during April-August, or about 74.9 percent of the full-year target.
Higher natural gas prices are set to encourage investment into the gas sector, say analysts.