Web Exclusive | Sense and nonsense about diesel prices

Web Exclusive | Sense and nonsense about diesel prices
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First Published: Fri, Oct 05 2007. 01 12 PM IST

Murad Ali Baig, Auto expert & columnist
Murad Ali Baig, Auto expert & columnist
Updated: Fri, Oct 05 2007. 01 12 PM IST
New Delhi: The steady increase in crude prices suggests that another price increase on petrol and diesel is soon expected. In the past, diesel prices have been kept low by those who believe that raising it would be inflationary and would hurt vulnerable sections. But this is a rather exaggerated myth.
Murad Ali Baig, Auto expert & columnist
Since the transport element varies between 2 to 6% of the price of most goods and the cost of fuel is just 35% of this cost, cost of diesel is just 1.4% of the cost of most goods.
Thus even a doubling of diesel costs will only have an impact of 1.4%. For instance, India’s four million trucks and buses also have to pay capital and finance costs on their vehicles, staff salaries, tyres, repairs, taxes, bribes, etc., that are largely unaffected by fuel prices.
The impact could be a bit more pronounced on locally sourced vegetables, milk, fruit or meat products and many traders will try to use a fuel price hike as an excuse to push up prices but they cannot argue with simple arithmetic.
Road transportation is estimated to account for over 55% of India’s diesel consumption while 6% is consumed by railways. As most of the food grains, sugar, petroleum products, steel, coal and cement are transported by rail and low cost diesel for railways would ensure that the impact on inflation is further moderated.
It is also widely thought that increasing the price of diesel would hurt the politically important farmer community. The logic here is equally flawed. The diesel consumption for tractors and irrigation pumps has been roughly estimated at about 23% of India’s total diesel consumption and the cost of diesel is less than 2% of the cost of agricultural products.
So a big diesel price hike will only have a marginal impact on agricultural prices. It is also worth noting that most of the tractors and pump sets are owned by the more affluent farmers, so a diesel price hike will not affect any poor farmer.
According to estimates, about 10% of India’s diesel is consumed by private and industrial gensets who definitely do not deserve any subsidized fuel, nor do the increasing numbers of people driving diesel fueled passenger cars.
In which case, if a diesel price hike is only marginally inflationary and does not really hurt the farmers where are the vested interests that are keeping diesel prices low? The cost of diesel and petrol is practically the same at the refineries. The low cost of diesel in relation to the high price of petrol in India is through a subsidy and also leads to widespread adulteration.
Highly subsidized kerosene is widely used while diesel costing about Rs 14 less per litre than the cost of petrol from an adjoining pump is a constant temptation. This widespread malpractice adds to India’s pollution and is damaging to vehicle engines.
In 2004-05, India consumed 30.7 million tonnes of diesel and 8.3 mt of motor gasoline. So unlike most countries, India consumed 5.8 times more diesel than petrol and had to import considerable pre refined diesel as well.
The Finance Minister should seriously consider that a Rs 1 increase in the price of diesel will generate as much revenue as a Rs 5.25 increase in the cost of petrol and thereby help reduce the Government’s deficit financing.
Resultantly, a narrowing of the price gap between petrol and diesel will keep average fuel costs down and discourage a mindless shift from petrol to diesel cars. This may hurt the adulterators but not the farmers and will certainly not be very inflationary.
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, Oct 05 2007. 01 12 PM IST
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