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Who Benefits From India's Diesel Subsidy?

Government has announced that bulk diesel consumers like railways and
state transport corporations have to purchase diesel at market-determined
rates, while diesel purchased at fuel outlets will continue to receive subsidy.
Assuming diesel subsidy as Rs.10 per litre, let us examine the effects of the
recent government order.

Mr.Suresh Kumar (not his real name) living in Bandra, Mumbai, maintains
three cars, but we will keep the discussion to the SUV that only he uses.
Mr.Kumar's SUV gives him 8 km per litre, and on average he drives about
2,000 km every month. He thus purchases 250 litres of subsidized diesel,
and utilizes subsidy of Rs.2,500 (250 litres x Rs.10 per litre) every month,
or Rs.30,000 annually, for his SUV. This subsidy is borne by tax payers,
which include all citizens including the poor, for whom cost of essentials
includes indirect taxes. But for Mr.Kumar, the more he drives around, the
more diesel he uses, and the more subsidy he utilizes.

On the other hand, domestic worker Sonabai living in a Mumbai chawl, has
to travel by BEST bus, spending Rs.30 on bus fare every day to and from
work. But BEST, which is a bulk consumer of diesel, has to purchase diesel
at market rate, and hikes the bus fare so that Sonabai spends Rs.40 every
day instead of Rs.30. That is, Sonabai spends Rs.10 more every day
(Rs.3,650 more annually), while Mr.Kumar avails of Rs.30,000 subsidy
annually.

Let us consider the cost to the environment. Noting that whosoever is


responsible for consuming diesel, every litre consumed produces exhaust
gases that pollute the environment. Whether Mr.Kumar's SUV carries one
passenger or more, it consumes essentially the same quantity of diesel and
creates the same quantity of exhaust gases. Mr.Kumar's SUV has a seating
capacity of 8 passengers, but usually it has only Mr.Kumar himself. Thus,
his SUV is used at 1/8 of its carrying capacity, but the diesel consumed and
the consequent pollution caused, is no less. As a single individual, he
consumes the diesel that 8 could have used. As assumed earlier, his SUV
gives 8 km / litre or, put another way, uses 125 ml / km. Thus, if the SUV
had 8 passengers, each passenger would be effectively using 125/8=15.6 ml
/ km. But since Mr.Kumar's SUV provides transportation only for himself,
the per capita diesel consumption of his SUV is 125 ml per km, and
produces per capita pollution from burning 125 ml / km.
On the other hand, consider Sonabai's bus. It has a seating capacity of 52
and a standing passenger capacity of 24, but when she travels it is “rush-
hour” both ways, and the bus is packed with about 100 passengers. While it
costs essentially the same to operate the bus whether it is empty or full, it is
obviously most economical when the bus is full or over-full – occupancy is a
major determinant of the economics of a vehicle. However, economics does
not trouble Mr.Kumar when he travels alone in his SUV and fills its tank
with subsidized diesel using his credit card.

The bus consumes about 0.5-litre of diesel per km @ 2-km per litre. Thus,
for every kilometre travelled during rush-hours when the bus carries 100
passengers, each passenger effectively uses 500/100=5 ml of diesel, and is
responsible for pollution due to burning 5 ml of diesel. That is, the per
capita diesel consumption in a bus is 5 ml per km, producing per capita
pollution from burning 5 ml per km.

Thus, Mr.Kumar ordinarily consumes 125/5=25 times as much diesel as


Sonabai, and is responsible for about 25 times as much exhaust gas
pollution as her. And, while she effectively subsidizes his diesel
consumption, Sonabai is multiple times more eco-friendly than Mr.Kumar.

Finally, consider the traffic congestion on the roads. Mr.Kumar's SUV, like
any vehicle, occupies road space when it moves or when it is parked on the
roadside. It is true that a SUV is about half the size of a BEST bus, and a bus
too occupies road space though only when it is on the move, because it is
never parked on the roadside. Nevertheless, the per capita usage of road
space has arguments similar to those for diesel consumption, and
Mr.Kumar uses much more road space, which is a public good, than
Mrs.Sonabai who represents the vast majority of urban poor. Thus Sonabai
is far less demanding of civic amenities than Mr.Kumar.

Thus, on a per capita basis, Mr.Kumar uses more road space, consumes
more diesel, and causes more pollution than Sonabai, and even gets his
subsidized diesel at her cost. Further, there are many lakhs of people like
Sonabai and only many hundreds of people like Mr.Kumar, and it does not
require rocket science to understand who subsidizes whom, and who is
more responsible for diesel consumption, vehicle exhaust pollution and
road congestion. Further, at the hiked bus fare, Mrs.Sonabai spends Rs.40
per day or Rs.1,200 per month on transport, 20% of her Rs.6,000 per
month wages. But Mr.Kumar spends Rs.13,000 per month (250
litres@Rs.52/litre) on diesel for his SUV and it is less than 1% of his
declared monthly income of several lakhs.

This discussion indicates who is most responsible for some of the ills of
urban living, and hopefully will serve to urge government to adhere to its
own National Transport Policy, which incentivizes affordable public
transport (not Volvo AC buses that Sonabai cannot afford) and
disincentivizes use of private motor vehicles. Contrary to Mr.Moily's
assertion, charging market rates for bulk diesel consumers forces those who
are already poor, to pay more for their living. Thus, the policy of the present
and previous Union governments is arguably pro-wealthy and effectively
anti-poor.