Photo: Mint
Photo: Mint

Opinion | High petrol prices can fund public transport

Changes in law this year have made it possible to use the road cess levied on every litre towards this end

Slightly overshadowed by the news of rising fuel prices was a recent report about the Delhi Metro being the second most unaffordable in the world among metro systems that charge less than half a US dollar for a trip, with the average commuter paying 14% of their income to travel by it. A study by the Centre for Science and Environment recommended that both the state and Central governments adopt strategies to increase public transit ridership, and enable fiscal solutions to keep it affordable.

Meanwhile, opposition parties called a bandh recently to demand that the government take steps to reduce fuel prices. But is this really the best solution? In major urban centres, at least, a more sustainable solution would involve keeping petrol prices high and investing the tax revenue generated into funding public transit and keeping its fares affordable. This is now possible by law, thanks to a change brought about in the 2018 Union budget.

The price of petrol comprises substantially of taxes—only about 50% of the market price is made up by the cost of production and refining. Besides excise duty levied by both central and state governments, the former has, for the last two decades, levied a road cess on every litre of petrol (and diesel) as additional excise duty, towards the Central Road Fund.

Established by an Act of Parliament in 2000, the proceeds of this fund were, until 2018, used for road construction, including programmes such as the National Highways Development Project (NHDP) and the Pradhan Mantri Gram Sadak Yojana (PMGSY) for construction of rural roads. The cess, originally 1 per litre, has increased to 8 per litre in the 2018 Union budget, and been renamed as the infrastructure cess.

The 2018 Finance Act also renamed the fund as the Central Road and Infrastructure Fund, expanding its ambit to cover other kinds of infrastructure beyond roads. Among the new categories for which the fund is to be used is urban public transport. In 2018–19, the fund is expected to receive over 1.13 trillion from the infrastructure cess. Delhi offers an interesting example of how this could be used to benefit citizens and contribute to offsetting carbon emissions from petrol (and diesel) cars.

In 2016, the Delhi Metro’s fourth fare fixation committee (FFC) submitted its report. It analysed the Delhi Metro Rail Corporation’s (DMRC’s) finances on the basis of the existing fare structure, and concluded that the company would face increasing losses. Therefore, it proposed a fare hike of 100%. This was implemented in two phases—in May and October 2017—as the FFC itself noted that 30% of Metro passengers earned less than 20,000 a month and a single steep hike would adversely affect them. Nevertheless, it resulted in an immediate drop in ridership by 15%, while the DMRC is set to project an operational profit from 2018-19. One might argue that revenues increased, but surely the purpose of public transit is not to generate revenue but transport the largest number of people at the least cost—to them, society and the environment. What has instead resulted is an “operationally profitable" public transit system that serves fewer people at higher cost. With rising fuel prices, the cost of private transport (after the fare hikes, operating a two-wheeler on many routes became cheaper than using the Metro) has also increased.

The government has two ways of resolving this unsustainable situation: (1) reduce taxes on fuel, making private transport cheaper; (2) reduce fares, making public transit cheaper. The second is obviously the more environment-friendly and sustainable solution for the city and its residents, beset as it is with pollution, traffic congestion and high vehicle ownership. A reduction of fares even to May 2017 levels will result in a drop of 25–33% for most journeys.

At these fares, the overall losses to DMRC (after accounting for operational expenses, depreciation, interest and loan repayments) will be in the range of under 600 crore annually, which is less than the cess revenue generated in Delhi through petrol sales alone). Delhi can thus afford to reduce its Metro fares using just the revenue from petrol sales.

Further, with the increased rate of cess from 2018–19, this revenue is likely to rise. The surplus, along with the revenue from diesel, can be used to make investments in other public transport providers such as the Delhi Transport Corporation and the Delhi Integrated Multi-Modal Transit System, as well as improvements in pedestrian infrastructure—especially in the vicinity of Metro stations and bus stops to ensure seamless and improved connectivity for all citizens.

This model, with some tweaking (to apportion revenue earned at the city level in other states) can be applied to other urban areas as well. The Central government should, therefore, begin treating the infrastructure cess as a carbon tax in urban areas and ensure that the revenue accruing to the Central Road and Infrastructure Fund from urban areas is invested in urban public transport.

Whether car and two-wheeler owners will be incentivized to reduce using their vehicles because of this is difficult to say. However, in economic theory, carbon and other Pigouvian taxes operate on the premise that undesirable actions must come with a cost. Even with no change in private vehicle usage, the result will still be an affordable and improved public transit system for everyone.

Manish is a research associate, Centre for Policy Research.

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