Why India Should Hike Diesel Prices

 
on May 26 2012 12:29 PM
Gas pump
Gas prices are still playing an outsize role in determining consumer confidence Reuters

Fearing a political backlash, the Indian government has postponed the decision to hike the diesel prices for the time being. However, economists feel that it is time the government deregulated the prices of diesel and stopped subsidizing them.

In India, diesel price is highly subsidized and is nearly 40 percent less than petrol price. After the recent price hike, petrol now costs Rs 78.57 per litre in Mumbai while diesel is priced just Rs 45.99 per litre in the city.

Unlike petrol, which is regarded as a rich man's fuel, diesel has the common man's fuel tag. The agrarian rural India depends on diesel and kerosene for its farming purposes, and freight charges are also depended on diesel. These make a hike in diesel prices a political issue in the country and successive governments have kept the diesel prices low by subsidizing them. Therefore, the government still regulates the diesel prices while petrol prices were deregulated two years ago.

Economists feel that it is high time the government woke up to the reality that diesel price subsidies are helping the rich rather than the poor farmers. The sooner the government bites the bullet, the better, Business Today quoted Sunil Sinha, director, Research, at ratings agency CRISIL.

Economists cite several reasons for deregulating both the diesel and kerosene.

  • It is argued that diesel hike will affect the agriculture sector. But analysts say it is wrong because dependence on diesel and kerosene for agricultural purposes has reduced over a time. This dependence can be further reduced if the amount of money the government spends on fuel subsidy is spent on improving the energy and power supply to rural areas.
  • Freight charge is another criterion for the government to keep the diesel prices reduced. However, experts feel that the government should work out a differential system of tariffs for public sector freight carriages.
  • The wide gap between the petrol and diesel prices is unscientific, as the higher petrol prices will lead to the rise in diesel car sales. High-priced diesel cars, especially the SUVs, get benefits from the cheap diesel and their rich owners will pocket the subsidies meant for the poor farmers. It is unacceptable that government should continue to incur huge revenue losses. With each litre of petrol replaced by diesel to run a car, excise earnings drop seven times. These losses will increase with the growing share of diesel cars and SUVs. The effect is so dramatic that the excise earnings from both diesel and petrol are now nearly equal, said Anumita Roychowdhury, head of CSE's air pollution team.
  • Apart from this the, the Central government is estimated to have lost close to Rs 8 billion in fuel excise duties, just from the diesel used by the new diesel cars sold in 2010-11.
  • Moreover, economists point out that subsidies in present form really don't benefit the deserved, or the government, because any kind of loss suffered by the state-run oil companies, due to subsidies, are borne by the government itself. The current difference between the actual price of diesel and what the consumers pay for it is around 12-14 rupees per litre and this comes to billions of rupees a year. With an expected surge in diesel car market, this amount is set to increase.
  • The situation can worsen the Indian economy, which is going through a rough patch as the rising current account and fiscal deficit, policy paralysis, and depreciation of the rupee have affected the country's growth rate. India's Index of Industrial Production (IIP) averaged 2.8 percent in 2011/12, compared to 8.2 percent in 2010/11. The current account deficit stands at $19.6 billion in the October-December 2011 quarter, compared to the $10.1 billion a year earlier. Any government inaction on economic front will balloon the crisis further.
  • Another matter of concern is the environment, because the petrol price hike and the increased diesel car sales will lead to a rise in pollution and traffic congestion considerably. According to the Centre for Science and Environment (CSE) data, 50 percent of the total new car sales in India comprise of diesel cars and in the popular compact car segment, diesel cars form 70-75 percent of all car sales. Government is ignoring the severe public health impacts of dieselization in Indian cities; the energy impacts of the steady shift towards bigger diesel cars and SUVs; and crippling revenue losses on account of subsidy of rich car owners, the CSE said. Pointing to the dangers of high dieselization on people's health, the CSE said, The current emissions standards in India legally allow diesel cars to emit more particulate matter and nitrogen oxides. India is dieselizing without clean diesel (diesel with 10-ppm sulphur diesel and advanced emissions control systems).

Analysts and trade bodies feel that economy needs a boost now to instill confidence in investors. Deregulating, and ending diesel subsidies will be the best step towards it.

They say the government should implement differential rates for the diesel SUVs and the farming sector to start with.

As for the pricing, the full market price should be charged for diesel used for moving large cars and luxury buses, while the increase should be very moderate for others to begin with, Assocham (Associated Chambers of Commerce and Industry of India) secretary general D S Rawat was quoted as saying by Business Today.

The economists also feel that the government's current strategy of cutting the taxes will be counterproductive as by resorting to such measures, the government will be losing considerable revenue, which could be spent on infrastructure and development.

If government gives up a major source of revenue like this, it could only do so at the expense of either cutting sharply its development expenditure or raising the level of deficit financing. Either way it would be counterproductive for a government committed to raising the growth rate and also making this growth inclusive, Assocham said.

However, the government should be cautious in taking the step as it has to deal with the rising inflation. It will not be an easy decision. Increasing the price would mean a further spike in inflation. There is a direct conflict between controlling inflation and increasing the price of diesel that cascades into inflation,, Ajit Ranade, chief economist at the Aditya Birla Group, was quoted as saying by Business Today.

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