Deregulation: Solving diesel conundrum……Jamshyd N.Godrej
As crude oil prices continue to rise,diesel price reform becomes even more essential.At stake is the longterm sustainable development of India.While the case for deregulation appears strong,diesel price control imposes many costs on our country.
The current diesel subsidy of about Rs 7 per litre costs state-run oil companies over Rs 125 crore a day.Subsidies lead to under recoveries by oil companies;resultantly they lack financial resources for developing our domestic oil and gas sector.This is detrimental to Indias energy security.Our crude oil import dependence stands at 80% and is expected to worsen in coming years.
By keeping private players out,price regulation prevents development of a competitive oil and gas industry.Additionally,compensation provided by the government to partially cover losses of oil companies increases the countrys fiscal deficit;in effect it is a bill that will have to be paid by our future generations.
Consider the dwindling case for the diesel subsidy.One of its purposes was to support the vulnerable sections of society.However,in recent years the sale of diesel cars and SUVs has experienced such rapid growth that diesel consumption by these vehicles now exceeds agricultural use of diesel by around 25%.
A car owner can afford to pay market price for diesel.The cheapest diesel cars cost over Rs 3 lakh and many diesel passenger vehicles are large cars and SUVs that cost above Rs 15 lakh.At current crude oil prices,removing the subsidy will cost around Rs 7,000 a year to someone driving 10,000 km in a vehicle that yields 10 km to the litre;a small amount relative to the price of a vehicle.
The undesirable development that a growing share of the diesel subsidy is being claimed by car and SUV owners who can pay a fair price for diesel,led the Expert Group on Petroleum Pricing (Kirit Parikh Committee) to recommend complete decontrol of petrol and diesel prices last year.Petrol prices have since been deregulated,but not diesel.
By widening the gap between diesel and petrol prices,the diesel subsidy incentivizes purchase of diesel cars over petrol ones.If crude oil prices continue to increase,more consumers will opt for diesel cars resulting in ever greater under recoveries.
The lower excise duty on diesel compared to petrol,responsible for about Rs 10 of the price difference between the fuels,also inappropriately encourages purchase of diesel cars.If the Government favours lower excise on diesel to support social sector services,then in lieu of a measure that equates excise duties on diesel and petrol,a one-time additional excise tax of Rs 80,000 on diesel cars should be considered,as recommended by the Kirit Parikh Committee.
Diesel exhaust adding to heart & lung ailments
No doubt diesel vehicles are more fuel-efficient than their petrol counterparts.But subsidizing diesel dampens the incentive for consumers to economize and implicitly encourages purchase of larger cars and driving of longer distances.By artificially lowering trucking costs,the subsidy constrains development of Indias rail freight sector;trucks consume four times the amount of diesel as rail.An oil-deficit country like ours can ill afford such excesses.
The diesel subsidy places a health and environmental cost on our country.Under recoveries prevent required-up gradation of facilities for supplying cleaner fuels,which has contributed to diesel vehicles and fuels currently sold in India not being as clean as they ought to be.
Exposure to respirable particulates in diesel exhaust is associated with increases in acute heart and lung diseases.Studies in India have linked exposure to traffic pollution with asthma in children living in Bangalore and respiratory problems in traffic police in Jaipur.
The Bharat IV and Bharat III diesel vehicles,currently sold in major metros and in rest of the country respectively,emit several times the amount of particulate matter and oxides of nitrogen compared to their petrol counterparts.India needs cleaner diesel vehicles,like the ones sold in the European market today.
Cleaner diesel vehicles require high quality diesel with sulphur levels not higher than 10 parts per million.Known as ultra-low sulphur diesel (ULSD),it has been available in Germany since 2003.Sale of ULSD in India will allow vehicle manufacturers to install particulate filters that can reduce harmful particulate emissions by over 90% from current levels and nearly eliminate especially hazardous ultrafine particles emitted by diesel vehicles.It is only at this stage that the adverse health effects associated with diesel exhaust are drastically reduced.
Adoption of cleaner diesel vehicles and fuels will help rid diesel of its dirty tag.Londons recently introduced emission-based congestion charge system exempts several diesel cars that meet Euro 5 air quality standards and emit 100 g/km CO2 or less;criteria that some popular fuel-electric hybrid cars fail to meet.
Unfortunately,no roadmap exists currently in India to require oil companies to produce and deliver ULSD across the country,and for vehicle manufacturers to produce Euro 5 vehicles they currently sell in Europe,and Euro 6 vehicles they will sell there from 2014.The Government must immediately fix this policy lacuna;given the diesel subsidy and higher pollution associated with diesel vehicles are interlinked both must be addressed together.
The government should provide direct financial support to ensure market pricing of diesel does not hurt the vulnerable.The minimum support pricing mechanism for major crops can be used to protect farmers.Similarly,the Jawaharlal Nehru National Urban Renewal Mission (JnNURM) is an avenue through which finances can be provided to keep public transportation affordable and the suggested additional excise tax could become a new source of revenue.
The writer is CMD,Godrej & Boyce Manufacturing Company