Responding to threat of rising fiscal deficit and a possible rating downgrade, the Government seems to be biting the bullet bit by bit on diesel prices. The Government has empowered oil companies to hike diesel prices in a phased manner. It's a brave step indeed. The oil companies have responded with a hike of 50 paisa per litre. But will this euphoria last? Let us see the finer points.

The diesel currently incurs around Rs 9.6 per litre of under recoveries. In comparison, small price hikes will be a drop in the ocean as far as curbing fiscal deficit is concerned. While oil companies have been authorized for time to time price hikes, there is no clarity on the amount and time frame for the same. Few years back petrol was fully decontrolled. Yet, oil companies incurred losses on it as they hardly ever raised prices without government permission. With 'regulated' price hikes expected on diesel, we would rather be conservative on follow up action. Especially because this will have cascading impact on various sectors resulting and can lead to inflation spiralling.