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Don’t fuel the hype

Why should roughly 90 million users of two-wheelers and small cars be punished simply because of an ‘opinion’ that hiking the price of diesel (and kerosene) will be inflationary? Murad Ali Baig writes.

india Updated: May 19, 2011 22:51 IST

Why should roughly 90 million users of two-wheelers and small cars be punished simply because of an ‘opinion’ that hiking the price of diesel (and kerosene) will be inflationary? Is it because these commuters are not organised while the misusers of these fuels are, and therefore can get political parties to agitate?

Crude oil prices will probably continue to rise but why can’t the government present the real picture?

Indian roads today carry roughly 80 million motorcycles, 15 million cars and 12 million trucks and buses. An average two-wheeler is 100cc and is driven for about 12,000 km per year. The average car is 1,200cc and is driven for about 10,000 km per year while the average truck or bus is 4,000cc and covers 50,000 km per year.

It follows that a commercial vehicle consumes roughly 18 times as much fuel as an average car and 160 times as much as a two-wheeler. Not surprisingly India’s diesel consumption is nearly five times higher than petrol and most (roughly 80%) of India’s automotive pollution is also caused by diesel-engined trucks and buses.

This also makes it is clear that the impact on oil companies can’t be solved by hiking the price of petrol because diesel prices are clearly the problem. Inflation is a serious issue but the myth that increasing diesel prices will be inflationary also needs to be corrected.

The cost of transport only averages roughly 5% of the total cost of most of the foodstuffs, soap, steel, cement and other things that people buy. The cost of fuel is only 35% of this transport cost because transporters also bear costs related to finance, salaries to staff, repairs, tyres, toll tax, bribes, etc.

The cost of diesel is therefore only 1.75% of the cost of goods. Increasing it will have a marginal impact on inflation. If the cost of diesel were raised by even a huge R10 a litre, its impact on inflation would be only about 0.4%.

Even this small impact on inflation can be mitigated by giving fuel to the railways at a subsidised rate. The railways transport most of India’s foodgrains, sugar, petroleum products, steel, coal etc,

and consume only 6% of the nation’s diesel. The impact on tractors and pumpsets will also have a tiny impact on the cost of farm products.

The current cost of crude at $112 a barrel comes to roughly R34 per litre both for diesel and petrol after refining. But the government is obfuscating the fact that the consumer also pays 5% customs duty on crude oil, excise duty at R14.35 a litre, value-added tax, education cess, transportation costs and dealer commission.

If the government is serious about containing inflation, it should charge a flat, per litre rate for all taxes and not reap a windfall percentage gain that multiplies the impact of every crude price increase.

Many vested interests are opposing an increase in the price of diesel. Nearly 20% of India’s diesel is consumed by millions of large and small gensets, which have no more social right to subsidised fuel than the users of diesel sports utility vehicles (SUV) or luxury cars.

There are many more who make a profit out of adulterating other fuels with subsidised diesel (and kerosene).

Inflation is a politically sensitive subject but most cars and bikes are now essential goods and their users should not be punished because of misguided information on the impact of diesel prices.

(Murad Ali Baig is a Delhi-based automobile analyst. The views expressed by the author are personal)

First Published: May 19, 2011 22:48 IST