The diesel dilemma

Arvind Jayaram

BL Research Bureau

http://www.thehindubusinessline.com/industry-and-economy/economy/article3487065.ece?homepage=true

 June 3, 2012:  

Retail prices of diesel have to be hiked by Rs 15.35 per litre if oil refiners are to break even on sales of the fuel.

However, the government is more likely to go for a moderate increase that will strike a balance between risking the ire of consumers and reducing its subsidy, feel experts.

In 2011-12, diesel accounted for around 59 per cent of the total under-recoveries of Rs 1.38 lakh crore incurred by public sector oil marketing companies on subsidised fuels.

At the current level of prices, the OMCs subsidy burden on diesel is projected at around Rs 1.09 lakh crore, which is 57 per cent of the estimated under-recoveries of Rs 1,89,605 crore in 2012-13.

Unsustainable

The government shouldered approximately 60 per cent of this cost in 2011-12 by doling out subsidies, amounting to Rs 83,500 crore to the oil companies for the year.

However, this is clearly not a sustainable exercise: the fiscal deficit for 2011-12 is expected to have grown to 5.6-6 per cent, against the target of 4 per cent for the year. On the other hand, the government will have to factor in that diesel prices have a cascading effect of inflation.

The fuel has a weight of 4.67 in the wholesale price index (WPI), which is the highest among the 670 commodities of the WPI.

For each rupee increase in diesel price, the WPI index is estimated to increase by 0.13 per cent.

While deciding to revise the diesel prices, the government has to take into account the interest of domestic consumers and protect the economy from the cascading inflationary impact of high international oil prices.

Another point of consideration for the government will be the growing price gap between petrol and diesel. With more frequent revisions of the retail selling price of petrol, the gap between prices of the more environment-friendly fuel and polluting diesel has widened to Rs 32.27 per litre in Delhi.

Unintended beneficiaries

This is encouraging higher consumption of diesel, not only by transport vehicles, but industry.

The gap between the RSP of furnace oil (Rs 58.65 per litre) and diesel (Rs 40.91 per litre) has made many industries opt for the cheaper fuel, though they are clearly not the targeted beneficiaries of the heavy subsidy.

The growth in diesel consumption during 2011-12 was 7.8 per cent, higher than the rate of 6.7 per cent registered in 2010-11.

On the contrary, growth in consumption of petrol has declined from 10.7 per cent in 2010-11 to 5.7 per cent in 2011-12.