Which segment of the Indian economy gets the largest share of the diesel subsidy dole offered by the Union government? Not farmers, not Indian Railways — it is the commercial goods transport sector, largely in private hands, that accounts for a little over a third of the total subsidy benefit.
The subsidy regime ensures the fuel is priced at Rs 41.29 a litre (price in Delhi), a discount of 22 per cent on its market-determined price. While truckers account for 38 per cent of the subsidy bill, passenger vehicle owners have a much smaller share, of seven per cent, though this has risen of late, due to a robust growth in the sales of diesel-run vehicles for passenger transportation, due to the fuel’s lower price. Their sales grew 35 per cent in 2011-12, compared with a 15 per cent decline of petrol-run passenger vehicles in the same period.
Within the transport sector, which accounts for annual diesel consumption of a little over 40 million tonnes (see table), the share of Indian Railways has declined. It is now estimated to consume only 10 per cent of all the diesel sold, largely because of the rapid growth of electric locomotives in the past several years.
State transport utilities, too, have seen their share stagnate at around 10 per cent, as many state transport undertakings have switched to the lower-priced compressed natural gas, considered more environment-friendly.
In sharp contrast to the transport sector, agriculture accounts for a relatively small share of 12.3 per cent in the total diesel subsidy kitty. It is followed by power and manufacturing with eight per cent each and the auto-rickshaw sector with three per cent.
Diesel use in agriculture is largely propelled by the use of generation sets for pump irrigation.
According to data compiled by Business Standard, the subsidy component for diesel (calculated as the difference between the current administered price and the market-determined price) is estimated at Rs 85,000 crore, based on 2010-11 consumption. The transport sector alone takes away Rs 57,500 crore.
Arguments given in favour of not raising diesel prices are that such a move would be inflationary. “If diesel prices go up, truckers will pass on the cost and the end-user of goods will bear the burden. So, by protecting the truckers, the government is trying to protect the consumers,” said Madan Sabnavis, chief economist, CARE Ratings.
However, it is not that truck rentals have not been moving up despite a stable diesel price since June 2011. While the price has risen by 8.4 per cent between April 2010 and now, truck rentals have increased 30-35 per cent. In the past year alone, the rentals saw a jump of a little over 10 per cent when no diesel rise occurred. Consequently, prices of various edible commodities have also been impacted.
According to S P Singh, senior fellow at the Indian Foundation of Transport Research and Training, there are 14 components which go into truckers’ operating costs. Diesel accounts for 30 per cent. While diesel remains stable, rentals have been rising due to increases in costs of tyres (30-35 per cent), chassis (18-20 per cent), and rising highway expenses.
Sector experts favour a market-linked price. “We have always been for decontrol of diesel prices. Diesel fuel should not be subsidised; it should be available to all at market prices. The subsidy should be directly provided to sectors it is intended for,” Singh said.
Instead of raising diesel prices, the government has been considering the idea of raising the duty on diesel cars that account for just one per cent of total consumption. “They should reduce the price gap between diesel and petrol. For every rupee increase in diesel prices, the government would earn Rs 6,000 crore, whereas, for a five per cent increase in excise duty on passenger vehicles, the government would get Rs 2,500 crore. More, a levy would also choke sales,” said an official at the Society of Indian Automobile Manufacturers.
Some also argue that farmers will take a hit due to a diesel price rise. However, the impact can be minimised through a robust price support system and the procurement price. The government also has a system of granting farmers a bonus over and above the minimum support price. This can be tweaked to take care of a diesel increase and to ensure genuine farmers benefit.
While the advantage of price control is limited, the perils are several. A controlled diesel price has seen consumption soaring year-on-year and burdening an overstretched economy.
From a share of 35.5 per cent in petroleum product consumption during 2006-07, diesel has grown to nearly 44 per cent.