Fear of diesel price hike
Dr Ashwini Mahajan
Latest statements of Chief Economic Advisor to Prime Minister about status of economic reforms, has once again brought the issue of diesel subsidy to the fore. Government had said that decision to decontrol has been taken much earlier, though sensing the sensitivity of the issue; it has not given any period for implementing this decision. Some time back government had expressed its intention to abolish subsidy on the diesel used for running luxury cars. However, there are issues in the practicability in discriminating between different uses of diesel and due to its non-feasibility; the move had to be dropped.
In the regime of the so-called market determined prices of petro products, petroleum companies have hiked the prices at least 10 times in a short span of time and price of petrol has been increased to nearly rupees 66 per liter (in Delhi), from nearly rupees 40 per liter. Prices of diesel, LPG and kerosene oil have also been revised, but the proportionate increase in their price was much lower than the petrol prices. Reason was that diesel, LPG and kerosene were heavily subsidised by the government in order to help agriculture, transport and poor masses who make use of kerosene and LPG. Citing high prices of crude oil petroleum companies are receiving huge subsidies for selling diesel cheap.
Is Subsidy a Good Policy?
LPG and Kerosene subsidy could be justified, as it helps in keeping the domestic fuel cost low for people at large and poor in particular. But the policy of granting subsidies is generally not approved by many economists. Their argument is that while giving subsidy, the price of the commodity is reduced artificially, and therefore its consumption would increase. The commodities on which subsidies are being given are actually scarce commodities as much valuable foreign exchange is used to import petro products. Increasing the consumption of these commodities may not be in the best interest of the nation at large. Not only that subsidy burden is rising, even foreign exchange outgo too is on rise.
In India price of diesel happens to be around 40 per cent lower than the price of petrol. This happens due to heavy subsidy offered by the government on diesel, in order to keep cost of agricultural operations and transport lower. In most other countries, where no subsidy is given to diesel, price of diesel is about 10 per cent higher. This is so because economic cost of production of diesel is higher than that of petrol and its efficiency is higher than that of petrol. Therefore, demand for diesel is accordingly determined. Thus, use of diesel would be determined on economic considerations and it would be more efficient. However, in India due to heavy diesel subsidy, diesel is being used indiscriminately. Generally, a middle-sized car run on diesel would give average of 18 to 22 kilometers per liter, whereas a car run on petrol would give an average of only 13 to 16 kilometers. Thus, due to subsidised and therefore lower price of diesel drives rich people to buy luxury diesel cars instead of petrol cars. In this manner, luxury by the rich is being enjoyed at the cost of the taxpayer. A big chunk of the subsidy bill, meant for reducing the transport cost of the goods, is actually making the travel cost of the rich lower.
Subsidy on Diesel for Luxury Must End
One theoretical solution is that we differentiate between diesel used by the luxury cars and charge a higher price for the same, so that subsidised diesel is not available for the luxury cars. However, this solution, though ideal may not be practical. We cannot expect from the operators of the petrol pumps to charge differentiated price of diesel from different types of users.
While presenting Budget 2012-13, the Finance Minister expressed concerns over rising subsidy bill. Subsidies have reached 2 per cent of GDP. No doubt subsidies such as food subsidy, fertilizer subsidy as well as diesel subsidy are meant for making the life of the people comfortable. But it is found that these subsidies do not reach to their targeted group. For instance a big portion of diesel subsidy is eaten away by the rich, as they enjoy the benefit of subsidised diesel to run their luxury cars. This tendency needs to be curbed.
Government is under pressure do away with diesel subsidy as the government is finding it difficult to cope up with high quantum of diesel subsidy. If government abolishes diesel subsidy, it may lead to sudden increase in the transport cost, which may make life difficult for the masses. Political scenario and coalition compulsions may also not permit the government to take this step. Therefore, government should find other ways to get rid of this menace. The people need to be discouraged to use luxury diesel cars and/or be compelled to pay the price. Under these circumstances additional taxation on luxury diesel cars may be a plausible solution.
Recently Centre for Science and Environment, an organisation working in the field of environment, has strongly opposed the ongoing ‘dieselization’ of luxury travel and has recommended for imposition of heavy tax on diesel cars, as they cause heavy environmental pollution. To discourage the use of luxury diesel cars, one time heavy tax on sale of diesel cars could be a good idea. From fiscal suitability angle this is good as diesel subsidy to be enjoyed on these diesel cars could be collected from the car purchasers in advance. Therefore, if car buyers want to purchase luxury diesel car on technical grounds, they may do so by paying higher tax in lieu of the benefit of lower price of subsidised diesel. This may reduce the attraction towards diesel cars and thereby give a relief to the exchequer and help reducing environmental pollution too.
(The writer is Associate Professor, PGDAV College, University of Delhi Email: ashwanimahajan@rediffmail.com)
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