Not raising diesel prices would harm economy much more'

The government has finally taken the bold step to hike diesel prices as well as limit subsidy on cooking gas. This is the highest ever diesel price hike that makes the fuel dearer by Rs 5 without value added tax. At the same time, the subsidy burden of cooking gas has been cut by limiting the number of subsidised gas cylinders to six a year per consumer.

This decision has been precipitated by the resounding “no” from the Union Ministry of Finance to meet the demand for a higher subsidy bill, in view of the expected massive under-recoveries of Rs. 1,87,127 crore for the financial year 2012-13. This is 35 per cent of the total plan expenditure for the same year! Such an onerous burden is unbearable in the wake of high international crude oil prices and sharp depreciation of Indian Rupee against US Dollar. 

From this price hike, the government will be able to mop up about Rs 15,000 crore and an additional Rs 5,300 crore by limiting the number of subsidised cooking gas cylinders.  But even after this price hike, the under-recovery on sale of diesel during 2012-13 will be a whopping Rs 1,03,000 crore.

The staggering subsidy bill gives no other option but to slacken price control. But the move has already drawn strong opposition from the left parties and UPA partners, the Trinamool Congress and DMK. They fear the cascading effect on the transport costs and farmers and the overall inflationary stress and are threatening to take to the streets to oppose this “retrograde and anti people” move.

Allay fears

“Not raising diesel prices may do greater harm to the economy,” says former member of Planning Commission, Kirit Parikh, who has just submitted a new study to the Ministry of Finance, based on his assessment of the impacts of decontrolled diesel prices. This assessment, yet to be released, shows that large under-recovery will further increase fiscal deficit, enhance money supply, stoke inflation and interest rates, negatively affect investments and lower GDP. Inflation rates will be much higher if nothing is done about reducing under-recovery.

On the contrary, if diesel prices are raised there will be some increase in prices but the economy will adjust in the short run and will witness more healthy growth. Parikh has further noted that the impact of the increased prices on poor and the rich will be bearable.

There is in fact further scope of rationalisation of taxes to equalise the excise on petrol and diesel and further increase diesel prices which is urgently needed to plug a range of other distortions creeping into the market due to cheap diesel prices.

The biggest loot is in the car sector, where 40 per cent of the fuel used is subsidised diesel, and the consumption is increasing. There are also deep fears that subsidised diesel is cheaper than industrial fuels like furnace oil. This is leading to huge diversion of subsidised diesel for industrial use as well. This is gross misuse of government subsidy. This massive increase in diesel use with the help of state subsidies has put Indian economy at serious risk.

Auto sector: the unfinished agenda

Diesel price hike is a step in the right direction. But till the time differential between diesel and petrol prices are not rationalised the direct incentive for diesel cars will remain. This will further stoke dieselisation with serious pollution and public health consequences.

The Society of Indian Automobile Manufacturers (SIAM) is reported to have viewed the diesel price hike as a reprieve that may put the proposal of higher taxes on diesel cars on the back burner. Diesel prices, though higher now, are still much lower than petrol prices and will continue to protect the diesel car market. Diesel cars are already 61 per cent of the new car sales. The car industry confirms that the actual demand potential is 90 per cent.

It is unacceptable that the government should continue to incur huge revenue losses on account of use of diesel in cars and SUVs. With each litre of petrol replaced by diesel to run a car, the excise earnings drop seven times. These losses will compound with the increased share of diesel cars and SUVs. The effect so far has been so dramatic that the excise earnings from both diesel and petrol has nearly equalled.

Account for public health costs

The health cost of diesel fumes adds to worries. The policy response to the recent pronouncement by the International Agency for Research on Cancer (IARC), a wing of the World Health Organization (WHO), that diesel engine exhaust is class I carcinogen and has definite link with lung cancer in humans is scary.

This finding comes at a time when India has failed to adopt a clean diesel roadmap, prevent use of under-taxed and under-priced toxic diesel in cars, and reduce its overall consumption in all segments. India must note that this decision has come from a rigorous review of the latest scientific evidence on the cancer-causing potential of diesel and petrol exhausts. Evidence on diesel's toxicity has been mounting over the past 20 years, which has already compelled stringent regulatory action on diesel quality and emissions standards in other regions of the world.

If the government fails to put the fiscal brakes, investment in diesel car facilities will continue. The car industry is now desperately reinventing to roll out more diesel models in the small car segment as well. This would also make industry more resistant to emissions improvement and undermine the negotiating power of the regulator to push for tighter emissions standards. Cheap diesel for cars will add to the subsidy burden.

It is also extremely worrying that even after the implementation of the Auto Fuel Policy in 2010, which introduced Bharat Stage III in the country and Bharat Stage IV in 13 cities, the government of India has not set the next target of moving quickly to Euro VI emissions standards. This will significantly delay adoption of clean diesel technology and add to the toxic risk. In fact, by the end of the 12th Five Year Plan, the so called modern diesel technology in India will be 17 years behind Europe!

Other governments have taken fiscal measures to discourage diesel cars. In Brazil, diesel cars are actively discouraged because of the policy to keep taxes lower on diesel. In Denmark, diesel cars are taxed higher to offset the lower prices of diesel fuel. In China, taxes do not differentiate between petrol and diesel. Sri Lanka has imposed very high duties for diesel cars which is as high as 300 per cent. Even in India several official committees have asked for special and additional taxes on diesel cars to neutralise the incentive of cheaper diesel fuel.

The diesel fuel price hike must not be rolled back. The roadmap for further tax and price rationalisation must be in place. But till the time price differential between petrol and diesel is eliminated impose additional taxes on diesel cars to neutralise its incentives from cheaper fuel. 

Otherwise, the rapid increase in use of under-priced and under-taxed toxic diesel in cars without clean diesel and restraints on its overall use will virtually amount to state-sponsored homicide. Public health costs must figure in diesel’s balance sheet.