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Web Exclusive | Hijacking fuel prices

Web Exclusive | Hijacking fuel prices
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First Published: Fri, Jun 13 2008. 03 49 PM IST

Murad Ali Baig, auto expert and columnist
Murad Ali Baig, auto expert and columnist
Updated: Fri, Jun 13 2008. 03 49 PM IST
New Delhi: India’s political parties, especially those in the opposition, transport and taxi unions and nearly everyone else is extremely agitated about the recent fuel price hike but only few realize that the Rs3 (roughly 8.5%) increase in diesel prices would affect freight transport costs by only a marginal 0.12%, that is equivalent to 12 paise on every Rs100 that is spent on what one purchases.
Murad Ali Baig, auto expert and columnist
The impact would be much more on bus and taxi fares but even here the impact should be 2.8% or less than Rs3 on every Rs100 spent. Transporters, industrialists, bus and taxi companies are however demanding huge fare increases to exploit the situation.
Elementary arithmetic will however show that the cost of transport in the cost of most goods averages just 5% and the cost of fuel is usually about 35% of this cost. India’s four million trucks and one million buses have to additionally pay large finance costs, depreciation, staff salaries, tyres, repairs, taxes, bribes, etc. So if the cost of diesel is just 35% of 5%. it is barely 1.4% of the cost of most of the goods that one buys.
Therefore, the recent 8.5% increase in the price of diesel should only have an impact of about 8.5% on this 1.4% or a miniscule 0.12%. It will vary a little and be even less on high value goods that are transported over long distances and a bit more on milk and vegetables that are transported over short distances.
The impact of diesel costs will however affect passenger fares on taxis and buses more seriously, especially when fuel accounts for about 35% of transport costs. But an 8.5% price hike on this 35% should result in a small 2.8% increase in passenger fares. Bus and taxi fares should therefore be up by about 3% and not by the huge amounts that are being demanded.
Road transportation is today estimated to account for over 55% of the country’s diesel consumption while another 6% is consumed by the railways that transport most of the food grains, sugar, petroleum products, steel, coal and cement, so subsidized diesel for the railways will ensure that the impact on inflation is further moderated. With this and the reports of a good Rabi crop, the anxieties regarding huge inflation seem misplaced.
As for the farmer community, diesel consumption for tractors and irrigation pumps is estimated at about 23% of India’s total diesel consumption but the cost of diesel is less than 2% of the cost of agricultural products. The price increase should again have a marginal direct impact on food prices. Very few of the tractors and pump sets are owned by the poor farmer so where are the weaker sectors for the Government to protect?
There is however an affluent segment that does not deserve any subsidy. It is roughly estimated that 10% of India’s diesel is consumed by private gensets. Few are aware that it is against the law to supply loose fuel to anyone except to farmers, so the widespread malpractice of loose fuel supplies, now so essential for the smooth running of offices, malls, condominiums and industries, will have to continue, although they can easily be made to pay a fair price. The dedicated tankers that supply them can also be made to charge much more.
The issue of petrol prices for the roughly 200 million people who use 60 million petrol-engined 2-wheelers and 12 million cars on a daily basis needs to be addressed. They consume only 17% as much fuel as diesel. But they are a political constituency with many poor users and do not deserve to be punished in the name of the weaker sectors. The Rs5 or roughly 12% petrol price hike will hit their pockets directly.
However, the automobilization process cannot be reversed and the average car owner will reluctantly raise his cars’ petrol bill from Rs3,000 a month to Rs3,400 and his bikes’ bill from Rs300 to Rs340. This may appear tough but is unavoidable. The main beneficiary of the continuing subsidy on diesel and even kerosene in relation to petrol are the not-so-weak sections of fuel adulterators.
And although the Government has finally taken a partial plunge by hiking the prices of fuels, further upward revisions are likely in the months ahead because the old prices had been pegged to a time when crude cost $60 a barrel and should have more than doubled now that it has hit $138 a barrel. The situation is unlikely to improve in the months ahead with the shrinking fossil fuel reserves worldwide. There have been no major oil or gas discoveries for two decades and almost all the big reserves are seriously depleted. There are plans to extract liquid fuels from large tar sand beds in Canada, Venezuela and elsewhere and from the liquefaction of coal but these will take many years. Biofuels and hydrogen also look promising, but will need even more time before they can be tested and ready for use.
With increasing prosperity, people in all developed and many developing countries are using much more energy for personal transport, entertainment, computers and for heating and cooling their homes and offices. Thus the costs of liquid fuels will have to go up further in the months ahead because no political party will be able to sustain the current, over Rs200,000 crore direct and indirect, annual fuel subsidies.
Murad Ali Baig is one of India’s foremost auto experts. Feedback to his column can be sent at livemint@livemint.com
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First Published: Fri, Jun 13 2008. 03 49 PM IST
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