It’s no surprise that the likes of Mamata Banerjee, the Marxists, most Indian politicians and the general public will be protesting against any price rise. They are all now predictably reacting to the recent price hikes of petrol, diesel and liquefied petroleum gas (LPG). All price rises are inflationary, but these are not nearly as damaging as many seem to think them to be. Very few people realise that the Rs 2 — roughly 5.7 per cent — increase in diesel prices will only affect freight transport costs by a minuscule 0.12 per cent — equivalent to 12 paise on every Rs 100 that you spend on the products that you buy. India’s four million trucks have to also pay for finance costs, depreciation, staff salaries, tyres, repairs, taxes, bribes, etc.
Elementary arithmetic makes this easy to understand. The total cost of transport averages just 5 per cent of the cost of most goods and the cost of diesel is about 35 per cent of the cost of transport. Thus the cost of fuel is just 1.75 per cent of the cost of goods. A 5.7 per cent increase on this 1.75 per cent will, therefore, have an impact of just 0.1 per cent. Transporters, bus and taxi companies will, however, routinely demand huge fare increases to exploit the situation and these must be resisted by showing the real economics. Six per cent of India’s diesel is also consumed by the railways that transport most of the food grains, sugar, petroleum products, steel, coal, cement and bulk goods, so subsidised diesel for the railways will ensure that the impact on inflation can be further moderated.
As for the politically important farmer community, diesel consumption for tractors and irrigation pumps is estimated at about 20 per cent of total use in India but the cost of diesel is less than 2 per cent of the cost of agricultural products. So a 5.7 per cent price increase in fuel should again have a very marginal direct impact on food prices. Very few of the tractors and pump sets are incidentally owned by poor farmers so there are no weaker farm sectors for the government to protect.
The Rs 3.50 increase in the price of petrol is, however, very unjust. Petrol not only fuels some 14 million cars but also some 80 million motorcycles and scooters that transport millions of middle income commuters who do not deserve to be punished for an obsolete old socialist shibboleth that cars are the luxury toys of the elite. Petrol consumption is also just a quarter of diesel consumption, so hiking the cost of petrol will not have a big impact on containing the fallout of the rising crude prices.
But the impact of diesel costs will more seriously affect passenger fares of taxis and buses, where fuel also accounts for about 35 per cent of transport costs and a 5.7 per cent price hike on this 35 per cent should result in a small 2 per cent increase in passenger transport costs. Road transportation is today estimated to account for over 55 per cent of India’s total diesel consumption.
There is, however, an affluent segment that does not deserve any diesel subsidy. It is roughly estimated that 20 per cent of India’s diesel is consumed by industry and private gensets. Most factories, offices, malls, cinemas and condominiums need captive power but they can easily be made to pay a fair market price. Dedicated tankers for bulk supply to them can easily be made to charge the full commercial price.
The cost of petrol and diesel is nearly the same at the refineries, as is clear from the fuel costs in almost all countries. But the Indian government rigs these by a series of costs and taxes to make them over 40 per cent more costly. So the users of petrol vehicles that ferry roughly 200 million people every day, on about 80 million petrol-engined two-wheelers and 14 million cars, are being unjustly victimised. The Rs 3.50 increase in petrol prices will hit their pockets directly. If they feel that the government is being unjust, they could become a sizeable political constituency.
India’s diesel consumption is four times that of petrol. So, from the revenue standpoint, every Re 1 increase in the cost of diesel is equivalent to a Rs 4 increase in the price of petrol. The main beneficiary of the continuing subsidy on diesel (and kerosene) in relation to petrol are not the weak sections but rich fuel adulterators. The government must transparently reveal the real costs of all fuels and also show the real impact of fuel cost increases to prevent vested interests from exploiting the confusion.
(Murad Ali Baig is a Delhi-based automobiles analyst The views expressed by the author are personal)