In a note issued from Singapore, its senior vice-president for sovereign risk group Atsi Sheth said, "The decision to fully deregulate diesel prices signals fiscal discipline on the part of the sovereign, which we view as credit positive.
"Diesel price deregulation will reduce the subsidy burden for the government, although fiscal savings are likely to be limited."
Last Saturday, the government linked the retail price of diesel by slashing prices up to Rs 3.77 a litre. Diesel price was cut after a gap of over five years.
She said the government decision to fully liberalise diesel prices and ease controls over natural gas prices, allowing the latter to increase by about 33 per cent, are credit positive.
This is because they allow the market to adjust to global commodity price trends and reduce the exposure of government finances to those trends, she said.
"Our stable outlook on the sovereign is based on our expectation of incremental credit positive policy changes in multiple areas over the coming months, and our assumption that the fuel subsidy reforms, which were introduced some years ago, will continue," Sheth said.
It can be noted that since September 2012, the government has implemented various reforms to the fuel subsidy programme, including allowing oil companies to increase diesel prices incrementally by 50 paise a month, withdrawing the subsidy on diesel sold in bulk, and limiting subsidised consumption of cooking gas.
Despite these steps, rising commodity prices actually led to a significant increase in the subsidy outlay, she said, adding in fact, the oil subsidy bill grew nearly six-fold over the past five years to Rs 85,500 crore in FY14, from Rs 15,000 crore in FY10. Total fuel subsidies accounted for less than 1 per cent of GDP and under 3 per cent of total government expenditures in FY14.

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