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Softening the diesel blow

Those who protest the government’s long overdue moves to hike the price of ‘dirty diesel’ on grounds that it will turn the screws on the poor ought to remember that 600 million Indians do not buy any form of commercial energy whatsoever, and the subsidies mainly benefit the middle classes and rich, writes Darryl D'Monte

hike in diesel prices

When the government was on the verge of gradually raising diesel prices last August, it was stymied by the drought in several states which made the move politically unpalatable. It has now taken the first, somewhat faltering, steps to gradually diminish the subsidies on diesel – it has to tread warily when the nation-wide elections are just a year away. The oil marketing companies have been allowed to make small increases, and they have responded by raising the price by a meagre 45 paise a litre for retail buyers. Over time – presumably in a year – they can raise the price by nearly Rs 10. For bulk consumers, which add Rs 12,907 crore to the burden of subsidies annually, the price will be raised every fortnight.

Predictably, in a Pavlovian response, both conservatives and the left have responded as if a dagger has been plunged through their hearts. They should be aware of the facts, and realise that for economic, social and, not least, environmental reasons, the reduction of diesel subsidies is long overdue. There is no such thing as a free, or less than cost, lunch in every situation.  And to put the entire issue in the correct perspective, when politicians shout about putting the screws on the poor by this move, they ought to remember that 600 million Indians or half the population, do not buy any form whatsoever of commercial energy – oil products, electricity, coal, or even firewood (which they forage, free of cost but not free in terms of relentless human labour). As many as 400 million of these do not have access to electricity, not necessarily because their villages are not on the grid but because they can’t afford “the last metres” to pay for a connection to their houses and bear the monthly bills.

There are of course secondary costs, like the prices of goods, including foodgrain and vegetables, going up because the diesel vehicles which transport these necessities will now have to pay more for their fuel. But, as we shall see in this column, the rises are minimal. And, one can easily argue, the 600 million or “the other half” lives largely on subsistence agriculture and buys and sells foodgrain and vegetables, which account for 70% of their consumption, locally. For all the rhetoric about safeguarding the poor, the truth is that it is the middle and upper classes which are mainly benefiting from the diesel subsidies. Nowhere is this perverse subsidy more apparent and abhorrent than in the use of this costly imported fuel in the gas-guzzling SUVs and other luxury and ordinary cars which are burgeoning in our cities.

In a definitive document issued in Delhi last August by the Geneva-based Global Subsidies Initiative, which is run by the International Institute of Sustainable Development in Canada, Kerryn Lang and Peter Wooders point out:

‘In fiscal year 2010–2011, the Government of India spent Rs 43,904 crore (US $9.6 billion) subsidising retail prices of diesel, kerosene, LPG and, to a lesser extent, gasoline. In addition, oil companies incurred Rs 37,190 crore ($8.2 billion) worth of under-recoveries, of which Rs 30,297 crore ($ 6.6 billion) was provided by upstream national oil companies.

‘In 2011-12, total expenditure on subsidies (including for fertilizer and food) grew by 26.7%. The Union Budget 2012-13 attributed the deterioration of India’s fiscal balance in 2011-12, in large part, to this increase in subsidies and stated that this level of growth in subsidy expenditure is not sustainable. The budget sets out the government’s intention to maintain total subsidies to under 2 % of GDP in 2012–13 and reducing to under 1.75 % of GDP over the following three years, although food subsidies will continue to be fully provided for. Policy measures, such as better targeting of subsidies and improved transparency, are planned to reduce the total subsidy bill.’

Some of the very same Cassandras – those on the right of the political spectrum – argue against the food subsidy itself as well as the right to work scheme embodied in the National Rural Employment Guarantee Act. These are two absolutely imperative social measures required to provide the basic minimum to “the other half”. However, it will be a travesty indeed if, under the guise of targeting  the subsidies more finely, the poor are deprived of either or both food and work due to their inability to get a Unique Identification Number or enrolment in the Aadhar scheme.

The authoritative study on the likely impact of the petroleum products (both petrol and diesel, mainly) has been conducted by Mukul Anand of the National Institute of Finance & Public Policy (NIPFP) last August. He records how the annual increase in international price of petroleum, by the end of March 2011, was about 37%. However, the domestic price of oil, on average, grew by only 6.3%. ‘This reflects only a partial pass-through of international prices onto the domestic economy,’ Anand states. The Reserve Bank of India (RBI) reports:

‘Empirical estimates show that every 10% increase in global crude prices, if fully passed-through to domestic prices, could have a direct impact of 1 percentage point increase in overall Wholesale Price Index (WPI) inflation and the total impact could be about 2 percentage points over time as input cost increases translate to higher output prices across sectors.’

The weight of mineral oils (that is, diesel and all other petroleum products) in the existing WPI basket is close to 10%, which co-relates closely with the (estimated/expected) direct inflationary impact of oil-price change in the domestic economy. However, as the full impact of increase in international prices has been muted by administered price intervention, the RBI warns that,

‘This indicates that prices could increase going forward as domestic inflation catches up with global trends. It is also important to make further progress in deregulation of fuel prices, particularly diesel (Anand’s emphasis). This would enable demand to adjust appropriately to price signals, reduce fiscal deficit and make the inflation number more representative of underlying inflation conditions.’

Diesel as an input is used by economic activities that comprise two-fifths of the entire GDP. However, as Anand emphasises, two-thirds of the diesel is used for transport. As any environmentally-minded economist knows only too well, this is highly energy-inefficient. Goods should be carried by rail for long distances – the Indian railway network is among the most extensive in the world – and by truck only for the last kilometre from station to door or vice versa. Due to the inefficiency of the railways, as well as the unthinking reliance on road transport in this era of unbridled privatisation, the nation is paying through its nose with subsidised imported fuel. In the border regions, where there is extensive truck transport which is inevitable due to the terrain, the suspended particulate matter is let out into the atmosphere and settles on the snow, causing the albedo effect – where the grey snow retains more heat by not reflecting the sun’s rays back and intensifies snow-melt in summer. This is known as the Asian Brown Cloud, or by its more politically correct and euphemistic title, the Atmospheric Brown Cloud, now a proven outcome of “dirty diesel” as well as the use of inefficient woodstoves in both rural and urban areas.

The government has tried to soften the blow on raising diesel prices by raising the cap on subsidised cooking gas cylinders from six to nine per year. This was strictly not necessary: those who use gas cylinders are not necessarily the poorest of the poor and the latter can obtain them through their Aadhar numbers, providing that is actually feasible and equitable. All said and done, after the initial outburst, the country has settled down to the notion that the price of diesel is not going to remain unchanged as it has for years. The surest sign that the market has taken note of this departure is the fact that diesel cars, on which the government is also contemplating a higher one-time tax, are by no means as popular as they were all this time.

Infochange News & Features, January 2013