Early this month, the Indian Railways signed a memorandum of understanding with Indian Oil Corp. Ltd (IOC) to explore the possibility of replacing diesel and instead using liquefied natural gas (LNG) in its workshops and locomotives in a phased manner.
This is a significant move in the right direction for an economy trying to “dedieselize” itself. India imports close to 80% of the crude oil, from which diesel is derived, that it requires. Sure, LNG is also an imported fuel, but broadly speaking in “calorie” terms, it is cheaper than crude oil. No doubt that gap has been narrowing over the years, but the economic rationale to switch is unmistakable.
In India, this rationale is mildly blunted since diesel is sold at subsidized rates. Besides, the penetration of LNG has been dismal thus far, with only two companies operating LNG-receiving terminals. However, this trend is changing. As many as four terminals are in the works on the east coast—IOC is one of the aspirants. To strike a deal with the railways is a good move as it seals up an “anchor” customer: The rail monopoly is the single largest consumer of diesel, accounting for around 6% of total consumption in the country. If the railways can embrace LNG outside the precincts of the workshops, as a locomotive fuel, that will significantly reduce the subsidy burden borne by the government and public sector oil companies. The total subsidy burden on mass consumption petroleum products, including diesel, liquefied petroleum gas and kerosene, is as high as 1.5% of the gross domestic product, with diesel accounting for a major portion of this. This is all the more relevant given the dim prospects of the government raising the price of diesel over the remaining three years of its term.
Going forward, the “dedieselization” process must travel to other sectors as well. And in some areas, such as the farm sector, the government has a role to play. Agriculture accounts for around 12% of diesel use. While a good part of it is used to propel farm equipment such as threshers and tillers, it is also used to energize pump sets for irrigation. This is because the state government is more concerned about offering electricity to farmers free of cost or at negligible tariff rather than offering quality power. A few years ago, farmers in Rajasthan showed that they were willing to pay for quality power. This is one intervention that will not hurt the vote bank and yet prove to be good economics.
Should the government bring a gradual end to the subsidy on diesel? Tell us at email@example.com