The government was dragging its feet for long on the subject of freeing diesel pricing and eliminating subsidies but when it did act last week, it got its policy all wrong. Oil companies have been given the freedom to charge market price for diesel supplied to bulk consumers such as the railways and state transport corporations while prices at the pump level will move up marginally. Retail prices will eventually catch up with the market, assuming that the oil companies raise prices at regular intervals. Market pricing for bulk consumers may prune the subsidy bill of the government significantly but it is a perverse policy because those who deserve the subsidy — the poor and lower classes who use public transport — will now be forced to part with more money for their daily commute or travel. State transport corporations will have no option but to pass on the higher fuel costs to their passengers given their already fragile financial state and the inability of fiscally-strapped State governments to reduce excise; the Railways have already increased fares and train tickets will anyway cost more from today. The perversity of the government’s decision will be evident if one considers that those who drive passenger cars — including high-end SUVs — that run on diesel engines will continue to enjoy the subsidy and pay at least Rs 10 a litre less than the bulk consumers. At the best of times, this is not a segment that deserves to be subsidised by the government. But for rich motorists to benefit when poor commuters are penalised upends all notions of equity.
The government seems to have gone for a politically expedient and administratively simple solution as opposed to other, more contentious but equitable options to reduce its subsidy burden and keep its own finances in shape. A cess or higher excise duty on diesel cars and SUVs that guzzle up subsidised fuel would have addressed the twin issues of reducing the fiscal burden of subsiding diesel while also eliminating the economic rent derived by passenger car manufacturers who price diesel vehicles at a high premium to petrol ones. This rent is a direct product of the higher demand for diesel cars compared to petrol due to the large price difference between the two fuels. Alternatively, the government could have seriously examined the feasibility of introducing dual pricing whereby trucks and cars can be charged differently with the former alone enjoying the subsidised price. The final option, of course, would have been to free prices across the board with only the Railways and state transport corporations allowed supplies at a subsidised price. Such a move would have ensured equity by ensuring that those who use public transport are protected while private, individual transport is made to pay the market price.