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Following is an article written by Dr. Bhamy Shenoy, an IITM alumnus.

After working for Conoco from 1966 to 1986, he returned to India to fight corruption. He has been fighting energy sector corruption for the last 22 years. Bhamy has been a consultant to the governments of Turkmenistan, Kazakhstan, Uzbekistan, Ghana and Georgia, and served as a board member of the Georgian National Oil Company where he was successful in exposing corruption. In this article, he shows how consumers of diesel are little affected if diesel prices are liberalized and how the poor will not be losers. If rational decisions are taken by the government then it has money to fund measures to improve education, health, water, transportation etc. all of help to the common man. But by continuing to subsidize diesel it is only enriching the rich at the cost of the poor. You may also find interesting two recent research reports on this topic released by the International Institution for Sustainable Development at http://www.iisd.org/gsi/fuel-subsidies-india

Tyranny of diesel subsidy: Rs. 40,000 crores loss by OMCs
Dr. Bhamy V. Shenoy If politicians are given the choice of improving education, health, and water facilities to the poor or subsidizing diesel, the choice should be obvious without any controversy. Still diesel subsidy is on its way to become a sacred cow for the political class. Why? How? What should be done to eliminate this subsidy which has been one of the reasons for the unanticipated decline in India’s growth rate from above 9% to around 6%.? Environmental harm caused by diesel subsidy in terms of contributing to global warming directly and indirectly is not even mentioned. The increasing share of

These are: trucking. Currently OMCs are incurring under recoveries from diesel alone of more than Rs. LPG and kerosene prices be also liberalized.30. They recommended that the poor could be supplied with subsidized products through coupon or smart card system while allowing their prices to reflect international markets. Integrated Child Development Services to help poor families. . There has never been a deliberate policy to subsidize diesel. Since diesel is relatively cheap (about Rs 25 per liter) compared to gasoline. power and industry with their respective shares being 37%. 15. only residential LPG and PDS kerosene were subsidized in a formal way to help the poor. Rangarjan.555. When three high level committees all headed by eminent economists (C. railways. The UPA government did not show any interest in implementing these recommendations. K.000 crores per year. private cars. 1. National Rural Health Mission to improve the operations of rural clinics etc. But the paralysis on the part of UPA to take action in liberalizing diesel pricing has resulted in ever increasing losses to oil marketing companies (OMCs). All these committees had recommended that not only the government should get out of the business of setting product prices. 2012-13 budgets for these flagships welfare measures are Rs. The political class is reluctant to liberalize diesel pricing.. 15%. 12%. B. I have been predicting for some time that these navaratna OMCs will face bankruptcy unless the pricing regime is liberalized. 12%.diesel vehicle sales is often discussed. buses. the share of diesel vehicle sales is increasing. 8% and 10% respectively. Chaturvedi and Kirit Parikh) were asked to look at the problem of petroleum subsidies during 2006-2009. Computation of under recoveries is faulty. agriculture.380 and 20. This is driven by the mistaken notion that such a policy will affect the poor. Consumers of diesel can be classified under seven categories to study this problem. 6%.25. One question that is always raised concerning diesel price increase is its impact on inflation. Such a mind boggling amount can easily pay for expanding Sarva Sikshana Abhiyan to improve education.822 crores respectively.

Cost to the farmers will go up. 7. 21%. Industrial consumers have the option of running generator sets based on economics. When we compute the increases in final consumption for other sectors. Of course it is neither advisable nor politically feasible to eliminate the under recoveries in one go and should be done gradually. 11. But its impact on final consumption is only about 0. But it is mostly those who use diesel generator sets who will be affected by this increase. Trucking diesel accounts for 35 to 40% of their total cost and diesel increase will raise their cost by 12. In the case of trucking too the inflationary impact on goods carried will be only 0. For householders who use standby generators. This is because the poor are not part of the formal economy. Still it is the trucking sector which makes the loudest noise by threatening to strike when diesel price increases.64% since trucking cost accounts for only 5% of the final cost of the goods.64% since trucking cost accounts for only 5% of the total cost of the goods we consume.When diesel price is increased. The impact on industry and agriculture is minimum since diesel cost accounts for just 1. private cars. . The same is the case for owners of private cars who can easily absorb the increase of 9. the figures are 9.0%.1% and 0. agriculture. But they not only pass the incremental cost of diesel price increase. Power sector will have the maximum impact.6%. Since it is mostly the rich farmers who use diesel pumps.6%. They are affected more from general inflation caused by fiscal deficit than from diesel price increases. So also there will be increase in the price of goods because of the cost of transporting them in trucks. railways. power.2%. Let us analyze how each sector is impacted by eliminating the current under recoveries of Rs. and industry. the cost of transportation will certainly go up. 0. buses. This is because railways and bus companies will increase fares to recover their additional costs. they should be in a position to pay for the increased cost. Electricity cost will also go up for those who use diesel to generate power.8%.89 per liter of diesel. What is of great interest is that the poor are affected the least. 4%. However when we look at the total impact it is easily manageable as shown below.3%. they overcompensate because of their monopoly position. the additional cost is not a big burden at all since it is only the rich who can afford diesel generator sets. 13.8% only.

This is just first order impact. When the government pays for under recoveries. When the government pays for the losses incurred by the oil companies. RBI’s governor Subba Rao have been saying that India cannot afford the diesel subsidy.08%. critiques need to find some other explanation to support the diesel subsidy. Many seminars have been held on oil sector subsidy to . However as a result of passing this cost of incremental diesel prices through different stages of the value chain through the economy. without considering the cascading impact of diesel prices which will push the resultant inflation higher. However as a result of diesel under recoveries (about Rs 2. they will go bankrupt and every one will suffer. No one has attributed it to the power sector subsidy. Even if diesel price is increased by Rs 14 per liter to eliminate all under recoveries the total impact will be just 1. This is only first order inflation impact. upstream public sector companies pay 30 to 40% and the rest is absorbed by OMCs). Still there is a basic question. who actually is the loser. it is bound to be higher but still manageable. With the declaration of an unprecedented loss of Rs.45% of GNP.4 lakhs during the last seven years) the impact on fiscal deficit is likely to be far more. these losses would come down. increase of diesel price by Rs 1 per liter will have minimal impact on overall inflation of about 0. All of us know that there is no such thing as a free lunch and the actual loser is the common man who has to bear the burden of higher inflation. Vote bank politics does not worry about such disasters as has been amply demonstrated by the recent grid failure. The inflationary impact of such a massive deficit is likely to be more than the inflationary impact of diesel prices. The Achilles heel of diesel liberalization is the credibility of under recoveries. PM’s economic advisor C Rangarajan. 40.000 crores by OMCs for the first quarter of 2012-13. the fiscal deficit increases resulting in higher inflation. It is true that when the government compensates OMCs for their under recoveries (government pays about 30%.1%. On the other hand if OMCs are not reimbursed.Since total diesel cost accounts only for about 3. In recent months highly placed technocrats like the deputy chairman of the planning commission Montek Singh Ahluwalia.

Along with them others in the government who deal with the petroleum sector like deputy chairman of the planning commission. coupons. . this may be a small price to pay. etc. It may finally start the process of eliminating the diesel subsidy. In the overall interest of India’s development. PM’s economic advisor etc should also threaten to resign. That may create a political tsunami and help bring about the needed liberalization of diesel pricing.recommend their removal and to improve subsidy delivery system through Aadhaar. Despite the shocking levels of losses why have chairmen of the OMCs not threatened to resign rather than preside over a process which is sure to bankrupt their companies? Such a sacrifice can be considered as a modern corporate form of satyagraha to prick the conscience of our political system. petroleum secretary. We are always waiting for the next political events like elections to be over. petroleum minister. But there has been no political will to liberalize petro product prices. It is high time that we have some out of the box type of action plans.