Title - Diesel death needs railways

Diesel and petrol in India is sold below cost. That difference between cost and retail price is called “under-recovery”, a classic Indian euphemism. That is actually a loss. Public sector Indian Oil Corporation was forced to declare a loss of Rs 22,451 crore for the period April to June 2012.This is the highest ever recorded loss declared by any Indian company! Hindustan Petroleum too suffered a loss of Rs 9,428 crore in the same period. These losses or “under- recoveries” will eventually be reimbursed by the government.   Last year the government’s total burden on account of under-recoveries was Rs 1,38,000 crore. This year the estimate is Rs 1,80,000 crore (a number similar to CAG’s estimate of losses due to coal mine allocations).This is really a fiscal burden, shared by taxpayers, and partly by ONGC. But this underpricing of petrol and diesel prices causes several distortions in the economy. Firstly it creates a huge fiscal burden that the government can ill afford. Secondly it puts a burden on oil companies, who should be using profits and capital for new investment, exploration and infrastructure.Thirdly it creates incentives for adulteration, black markets and corruption. (Remember the oil mafia burnt an officer alive near Nashik?) Fourthly, the extravagant diesel subsidy creates a perverse incentive to buy diesel luxury cars, leading to local pollution. Lastly it undermines any effort at conservation and development of public transportation.

There have been many government committees that studied this problem and suggested ways to tackle it. In February 2010 the committee chaired by Kirit Parikh of the Planning Commission recommended that petrol and diesel prices be linked to international market prices, and even the subsidy on cooking gas and kerosene to be progressively phased out.   In line with Parikh committee, petrol prices were brought closer to market prices, but diesel remains stubbornly subsidized. A recent report called the Citizens’ Guide to Energy Subsidies in India brought out by Geneva-based Global Subsidies Initiative (GSI) and the International Institute for Sustainable Development has comprehensively demolished the myth of subsidy sanctity.

The detailed report can be seen at the website www.iisd.org/gsi/fuel-subsidies- india. The report argues that oil price deregulation in India is imperative, and the social and economic impact of subsidies is far less than imagined.

The vulnerable groups can be helped with direct cash transfers, instead of an inefficiently subsidised retail price. (Maharashtra is the first state in the country which will begin cash transfers to the poor in lieu of selling cheap kerosene through ration shops.) The GSI study also disabuses the notion that government taxes offset fuel subsidies.

For example the total central plus state taxes collected on diesel is Rs 7.66 per litre, whereas the under-recovery (or subsidy) is Rs 13.64, almost twice as much. So the argument that “government is collecting the subsidies back as taxes” does not wash. The biggest villain is diesel subsidy.   It accounts for 59 per cent of all underrecoveries (since it sells for Rs 41 against petrol selling for Rs 71). It constitutes 38 per cent of all petroleum consumption. Two third of all diesel is used in transportation, which makes up 6.6 per cent of GDP. Here’s the strange thing.

Almost half of all diesel is consumed by trucks, running on highways (not inside cities). Though railways consumes much less diesel, and is much less polluting, its share of national road freight is just 30 per cent, which may decline further to 15 per cent.

This is in complete contrast with rest of world, where rail dominates road. Even China has built railway from Beijing to Tibet, recognizing the importance of rail over road. In 1950 in India, the railways carried 86 per cent freight, but today only 30 per cent.

Hence the death of diesel subsidy requires that railways be rejuvenated.