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BW Businessworld

The Road To Nowhere

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Despite the growing protest against misuse of subsidised diesel by the rich, the central government has no immediate plan to de-regulate diesel pricing. In a written reply in the Rajya Sabha on 21 August, minister of state for petroleum and natural gas R.P.N. Singh said the public sector oil marketing companies (OMCs) were losing Rs 15.55 a litre on diesel, Rs 29.97 a litre on kerosene and Rs 231 on LPG gas cylinders of 14.2 kg — a daily loss of Rs 450 crore.

During 2011-12, the OMCs lost Rs 138,541 crore due to under-recoveries from the sale of fossil fuels. This does not take into account the subsidy of Rs 43,904 crore provided in the fiscal budget. Raising the campaign pitch with a set of studies, the International Institute for Sustainable Development’s Global Subsidies Initiative (GSI) concedes that though the government was committed to reducing subsidies to 2 per cent of GDP, the risk of high inflation and price rise had not allowed any deregulation initiative.

The GSI study points out that though diesel prices include a relatively minor fiscal subsidy, the under-recovery is hitting the oil companies and the government, who between them are covering 25 per cent of the price. However, eliminating this 25 per cent under-recovery in diesel prices would lead to around a 1 per cent rise in general price levels. This is too big a burden for a low-salary economy and “even small spikes in inflation can put poor consumers at risk”, admits the GSI report. Sectors such as public road transport would be more vulnerable where prices could rise by as much as 8-10 per cent.

These campaign groups suggest that under-recoveries be gradually eliminated by “allowing prices to increase by an average of Re 1 per litre over one or two steps per month, over a year or more.” Meanwhile, direct compensation to businesses that will struggle with higher diesel prices in the short-term, including public transport companies, can also be considered. GSI collaborated with the National Institute for Public Finance and Policy and The Energy and Resources Institute to bring out these reports.

A 2009 World Bank study points to international experience. In 2008, the Mozambique government reduced taxes on a variety of oil products in response to high world oil prices. This was a replicated in 49 countries that intervened against the full pass-through of world oil price rises into transport fuels for consumers.

India’s experience with rationing and dual pricing has been negative. A 2005 study by the National Council of Applied Economic Research estimates that about 38 per cent of PDS kerosene gets diverted to the black market. With better monitoring, this has been brought under some control.

The biggest controversy is with diesel. With petrol costing about 42 per cent more, the use of diesel has shot up to 44 per cent of total fuel consumption compared to 35 per cent a decade ago. The view that owners of fancy diesel-powered cars and SUVs and rich farmers powering their gensets do not deserve these high subsidies is gaining momentum. The Economic Survey 2012 suggests both ‘adjustment’ similar to China, as well as ‘high road tax and vehicle taxes’. However, Praful Patel, heavy industries minister, aligned himself with automakers and opposed any diesel ‘price adjustment’ formula.

For now, a consensus is unlikely.

(This story was published in Businessworld Issue Dated 03-09-2012)