Correcting distortions

By Anumita Roychowdhury
Published: Monday 15 September 2008

A committee recommends rationalization of diesel and petrol prices

The long awaited pricing formula for petroleum products to bail out the oil industry from impending bankruptcy has been tabled. If put into effect this prescription can correct distorted prices of automotive fuels of petrol and diesel and halt misuse of under-taxed and under-priced diesel by the car sector.

This is among the recommendations of a high powered committee set up by the Prime Minister under the chairmanship of Planning Commission member B K Chaturvedi in the wake of economic and energy emergency triggered by soaring oil prices and demand. In June 2008 the crude prices had hit us $130 a barrel--348 per cent higher than December 2003. But petrol and diesel prices have increased by only 50 to 60 per cent since 2004. Capping of retail selling prices of petrol, diesel, kerosene and lpg has squeezed cash flow and made subsidies more unsustainable.

To reduce the economic strain and correct the distortion in the fuel market, the panel has asked for periodic graded increase in automotive fuel prices to align with international prices; and make subsidies minimal and targeted at below poverty level that is transparent in the budget.

The panel is categorical about the misuse of subsidies and diversion of cheaper fuels for unintended uses. Foremost, "price differential has had unintended consequences of creating a price incentive for motorists to opt for diesel rather than for gasoline cars." While the losses per litre of petrol, due to under recovery, is Rs 16.33, for diesel it is as high as Rs 28.12. This fans demand for more polluting diesel cars.

The current differential in excise duty of more than 50 per cent between the two automotive fuels "is not desirable," says the Panel report. Excise duty on diesel should be more in line with that of petrol. For both the fuels therefore, it is proposed that the prices fully reflect the international price trend and is achieved through graduated increase in small increments (see box Visionary).

Concerned by the increased use of subsidised diesel in cars, the panel has proposed charging Rs 2 more per litre of diesel on Bharat Stage III diesel fuel in big cities. The panel is sensitive that price discrimination in favour of diesel creates positive incentive for public and freight transport. Oil companies have been asked to directly negotiate prices with bus transport agencies and railways. Improved public transport and switch to natural gas are also seen as crucial measures to improve fuel savings.

The new proposals are an important step forward as over a decade there has been strong public outcry over misuse of diesel subsidy by the car segment. The Centre for Science and Environment has warned that as the Union government earns much less from excise on a litre of diesel used by cars, as opposed to petrol, revenue losses per litre of diesel will be compounded with increase in diesel car sales. But diesel car owners recover their premium within four years, given lower diesel prices. This perverse subsidy to the rich comes at an enormous cost to public health. Diesel cars are expected to be 50 per cent of the new car sales by 2010.

There are fears that populist polity will not let these recommendations see the light of the day--especially during the election year. Trade unions have condemned it. Oil company representatives are sceptical of multiple pricing leading to more leakages. Automotive industry association siam claims it has not yet seen the report to comment on the probable impact on the diesel car sales.

In face of the opposition the final decision rests with the Prime Minister and the Cabinet. Clearly, any further delay in reforming the pricing of fuels can have serious economic and environmental consequences in all sectors. Distorted pricing will particularly worsen the pollution and energy impacts of explosive car growth.

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