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Updated: September 7, 2012 00:40 IST

Fuelling a manageable price rise

Darryl D’Monte
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The government must remove the subsidy on diesel, LPG and kerosene, and protect the poor from the impact through cash transfers

While the Centre had indicated that it was ready to bite the bullet and increase prices of petroleum products — mainly diesel — a few months ago, the combination of the slowdown in the economy, the drought and the political battles that the United Progressive Alliance was fighting on several fronts rendered the move unlikely. With the monsoon session of Parliament nearly over, however, it seems about to happen.

A little over a fortnight ago, the Prime Minister virtually ruled out the deregulation of diesel prices, in line with petrol. This was due to the failure of the monsoon and the demand by major grain growing States, Punjab and Haryana, for a 50 per cent subsidy on diesel for running pumps to irrigate their parched crops.

Tremendous pressure

The pressure on the national exchequer to keep the diesel price down has been tremendous. In 2010-11, the fiscal subsidy on diesel, liquefied petroleum gas (LPG) and kerosene — the three most highly subsidised fuels, accounting for two-thirds of petroleum product consumption — amounted to Rs 2,904 crore. To this, one has to add the “under-recoveries” of the government-owned oil marketing companies, which is the difference between the cost of these fuels and their selling price, in the absence of deregulation. In the same period, this amounted to Rs 17,156 crore, twice as much as the previous year. The total burden for 2010-11 thus amounted to Rs 20,060 crore.

However, there are other prices to be paid for this policy drift, quite apart from the “dieselisation” of the country. Owners of Mercedes Benz cars and gas-guzzling SUVs purchase highly subsidised diesel; this fuel is “dirty”, generating severe air pollution, not least carcinogens, from the exhaust. There is also the potential repercussion on direct and indirect tax revenues. The government budgeted for a 14 per cent growth in direct revenues this fiscal and 26 per cent in indirect revenue. Between April and June this year, they have grown by only 6.8 per cent and 14 per cent respectively. On April 25, Standard & Poor downgraded India’s rating to “negative”. If India does not ensure that the fiscal deficit remains within the budgeted 5.1 per cent of GDP, S&P will lower it to “junk” status, which will make foreign financial institutions think three times before entering the Indian equity market.

There has been political resistance from the Opposition and the Left parties (and, in all probability, several Congress leaders surreptitiously too) to raising diesel prices on the ground that it will affect the aam aadmi. However, a new study by the National Institute of Public Finance & Policy, under the aegis of the Geneva-based NGO, Global Subsidies Initiative (GSI), has shown, to the contrary, that raising diesel prices will not have any crippling impact.

The study shows that a 10 per cent increase in diesel prices — employing the economic caveat, ceteris paribus: assuming other prices and demand for commodities remain unchanged — will only cause the general price level to rise by 0.47 per cent. If prices of diesel were raised by 25 per cent, public transport costs would rise by 8 per cent, road freight transport by 10, railway transport by 3 and industry by 0.25 per cent. For energy and environment reasons, it is desirable to switch over from road to rail for long hauls of goods. For agriculture, assuming machine input comprises only the diesel costs of fuel and lubricants, omitting interest on the capital cost of farm machines and wages for manual labour, a 25 per cent hike in diesel prices would only raise the cost of cultivating wheat and sugarcane respectively by 2.75 and 0.75 per cent.

When it comes to the second petroleum product, LPG, reducing subsidies is more complex. As of May this year, a Delhi consumer paid an average of Rs 399 a cylinder, while the fiscal subsidy was Rs 23 a cylinder and marketing companies’ under-recovery Rs 480 per cylinder, adding up to a total of Rs 503 per cylinder, a subsidy of a little over Rs 100. LPG is generally used by the better-off in urban and peri-urban areas, many of whom can bear an increase in price. Around half the country’s total population never buys any form of commercial energy, not even wood, which is the most used fuel, and thus a LPG price hike does not affect the masses.

To make the LPG price hike more palatable, the Energy & Resources Institute (TERI) has recommended measures in a paper for the GSI sub-titled “Cash transfers for PDS kerosene and domestic LPG”. It recommends a “calibrated” decontrol of LPG prices. In 2010, a committee chaired by Dr Kirit Parikh, then in the Planning Commission, recommended gradual increases of prices of gas cylinders, to cushion the blow on consumers. Instead, TERI suggests capping the number of subsidised cylinders in each household to eight per year as an interim measure. Roughly, that would work out to two-thirds of a family of four’s consumption and might be a less acceptable step than increasing the price.

Poor person’s fuel

The most problematic fuel is kerosene, the poor person’s lighting and cooking fuel. If diesel prices are raised without following suit for kerosene, many users of diesel — auto-rickshaw drivers being a typical example — will substitute it with kerosene, causing severe pollution.

The National Commission for Applied Economic Research has found that 18 per cent of PDS kerosene was diverted to non-household use, both to the open market and to those who do not own ration cards. Bihar, Chandigarh, Delhi, Jharkhand, Orissa and Punjab register over 50 per cent of such diversion. TERI suggests that the price of kerosene can be raised by a rupee a month for a year.

The poor can be protected by direct cash transfers, as has been successfully experimented with in Alwar and Mysore. The Unique Identification (UID) and National Population Register (NPR) systems may in theory deliver this. If the total amount of savings on kerosene subsidies is given to a poor family, it will work out to an average of Rs 3,131 a year, or Rs 261 a month. If the kerosene subsidy is just halved, the payout would be Rs 131 a month. Between precept and practice, however, there is a yawning gap. When it comes to food rations, which are even more essential than fuel, there is officially estimated to be a 15-20 per cent leakage. For cash transfers, it can be safely predicted that the leakage would be higher.

In July, in the Special Bulletin on Food Justice in India published by the Institute of Development Studies in Sussex, U.K., Biraj Swain and M. Kumaran of Oxfam India’s Food Justice campaign identified three kinds of exclusion from both the PDS and the Integrated Child Development Services, which are entirely applicable to cash transfers for kerosene. The first is “official exclusion,” where the state deploys inadequate resources. Secondly, there are flaws in the implementation of the scheme, with poor monitoring and evaluation and what is euphemistically called “local elite control”, as happens with MGNREGA. The Institute of Dalit Studies in Delhi has been working on the exclusion of lower castes from food security and has identified no fewer than 98 forms of discrimination, which reinforce one another, compelling the Prime Minister to term it “a national disgrace”. Lastly, the policy itself can be flawed, particularly if the beneficiaries are categorised too narrowly.

Cash transfers for energy, therefore, are highly problematic in a country where “energy poverty” may not be directly correlated to “income poverty”, especially in certain tribal regions, where biomass is available in relative abundance. Last year, the Rural Development Ministry conducted a Socio-Economic and Caste Census, which laid down objective criteria for excluding households with certain assets, such as motorised vehicles, fridges, landline phones and even irrigated land, from receiving benefits. Such a yardstick could be applied, at least on a pilot basis, in certain districts, to cash transfers for kerosene. Together with raising diesel and LPG prices, this will save the country crores and could help to end distortions in the economy and society.

(Darryl D’Monte is Chairperson, Forum of Environmental Journalists of India, International Federation of Environmental Journalists, Mumbai. Email:

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Rather reducing the subsidy the government should focus in proper implementation of the plan programs, reduce tax evasions, make the PDS more efficient etc. When it comes to making policy decisions,the government is too slow but they act quite actively when it comes to raising prices and reducing subsidy. Many of the important bills are waiting in the parliament like GAAR,Direct TAX Code,Goods and Services act etc. This government is well known for its "policy paralysis". They are passing the repercussions of their non performance on the poor people of India.

from:  Divya Prakash
Posted on: Sep 9, 2012 at 10:07 IST

Plenty of useful numbers that show a reality different from all the whining and whinging about the "aam aadmi" by our political class, without actually paying attention to the fact that half our population does not buy any kind of commercial fuel! There is one mistake in this article about autorickshaws substituting diesel with kerosene. Most autorickshaws run on petrol or LPG, or CNG in some cities. The substitution from petrol to kerosene is a real and natural problem. There isn't much of a benefit for the few autorickshaws running on diesel to attempt to switch to kerosene. Kerosene burns in the spark induced combustion of the petrol cycle, and can only contaminate diesel, not replace it.

from:  B S Kumar
Posted on: Sep 8, 2012 at 11:39 IST

What nonsense!Financial jugglery is not simple arithmetic now a days.Our government can throw money in 2G scam, coalgate and so on! they are ready to amend a constitution for promoting SC/STs.If cash compensation is passed on to poor, it would not have any effect on them as either the money would be lost in drinking or it will be cornered by rich, if not Amabanis even by forging documents!

from:  Atis
Posted on: Sep 8, 2012 at 07:51 IST

when government fails to provide basic needs to the people,saving
crores to end distortions in economy is useless.

from:  nandini praveena
Posted on: Sep 7, 2012 at 23:56 IST

Please don't increase tax on poor like Aameer khan,Kamal hasan,Anil
ambani and Narayanamurthy. Please give concessions ,sops and lands to
them.Tax us heavily .Even if we don't have money we will borrow and pay
tax.Because we will never come to protest.Even we don't come to vote so
that you will again come and kill us again. We love you so much.

from:  aha
Posted on: Sep 7, 2012 at 21:17 IST

Government should make a policy to encourage use of solar energy for households and small to medium industrial units, which use diesel for their generators when power is gone.This will reduce consumption of diesel. Further, diesel run cars, particularly luxury cars, should be taxed heavily, their price doubled, and proceeds can be used to set off subsidy bill.

from:  AK Jain
Posted on: Sep 7, 2012 at 20:56 IST

I agree with some, if not all the points in this article.
1. The point that diesel in SUVs and BMWs are more polluting is
contentious. Energy used for refining petrol is lot more than Diesel and
the so called SUVs and BMWs do have better engines and emit much less
than the average car. Also Diesel engine emits lesser CO2 than a petrol
engine. The real pollutants are Lorries and buses with there under
maintained and often archaic engines.
2. A diesel price rice would give a reason for commodities like milk,
vegitables, meat etc and services like Bus, taxi or Auto to raise the
price. There is no real need but the whole burden is passed to the
consumer. This is due to a lack of uniform regulation in India.
3. The urban lower middle class and poor do use LPG and even a slight
rise has a very damaging impact on a Household's tight budget in a
All this said, I agree that the government should decrease subsidy, but
first a sustainable alternative should be in place.

from:  Guruprasad K
Posted on: Sep 7, 2012 at 20:43 IST

What loss to the exchequer is the gentleman talking about? If the government accumulates Rs. 50,000 crores of taxes from petroleum products and then gives Rs. 20,000 crore as subsidy, are they in loss?
There is no point in deregulating diesel and petrol when we have such high taxes.

from:  Suraj
Posted on: Sep 7, 2012 at 20:21 IST

Just a spider-net of words, as these people learn to write words, they assume that they can write anything. Lets take few lines from the article ..

>>"the three most highly subsidised fuels, accounting for two-thirds of petroleum product consumption — amounted to Rs 2,904 crore. To this, one has to add the “under-recoveries” of the government-owned oil marketing companies... in the absence of deregulation... In the same period, this amounted to Rs 17,156 crore, twice as much as the previous year. The total burden for 2010-11 thus amounted to Rs 20,060 crore."<<

... how much it comes to be the percentage of union budget? not more than 0.22%. But what about the tax exemptions that are given to big industries and higher middle class which is touching nearly 5 lac crore rupees per year. If anyone wants to charge from car-owners, why don't add taxes to the purchasing of these vehicles and then yearly cess on the owners? Rs. 20,060 crore will not be a big amount if we tax like this.

from:  amrit
Posted on: Sep 7, 2012 at 19:04 IST

I completely agree with author on cutting down subsidies in systematic and well researched manner. My concern is what will government do with extra cash saved. I'm very sure the moment government get surplus cash, it will go all out on populist measures. Elections are just around the corner and cash crunch might prevent government from doling out extra cash to buy votes. And if government was so serious about financial crunch, it would have not allowed Raja to usurp spectrum proceeds nor it would have allowed Kalmadi to rule and ruin common wealth games. Coalgate is latest jewel on its crown.

from:  Abhishek Garg
Posted on: Sep 7, 2012 at 17:43 IST

UPA government are blessed with world renowned economist and other financial expters. They know the consequence of fuel hike better than anybody else in the country.

I believe high remuneration in the oil industry other than cost of production may cause the rise. the cost of ltr petrol is less than 10Rs in the GCC countries. It is because of wise leadership in that countries, they know the consequence of fuel hike , so they subsidised heavily not only oil but also control food price.

Now the world is united against Iran, one of the largest oil producers in the world. It is time to import more oil from Iran and reduce the oil price.

from:  Jamshid Thalassery
Posted on: Sep 7, 2012 at 17:37 IST

Deregulation of diesel for automobiles and continuing the subsidy for
agricultural activities can further lead to corruption. The government
should think twice before introducing any such law.

from:  Gaurav Singhal
Posted on: Sep 7, 2012 at 16:59 IST

It is extremely important that the Government takes the positive step of
diesel price deregulation. Being a car owner, this move would be
expensive for me, but, I can take that expense for the country. Plus, if
I switch to public transport as I fully intend to do, this move might
even end up saving costs for me.

from:  Gayathri
Posted on: Sep 7, 2012 at 16:10 IST

The government should focus its energies in collecting tax from the super rich and use it to meet the subsidy requirements for the benefit of the majority of indians

from:  vivek
Posted on: Sep 7, 2012 at 16:08 IST

more concessions more scam. cash transfers and things like that will not
work. long term thinking and judicious use of petrol may help to curb
the trend to some extent. encouraging public transport is important.

from:  srikumar
Posted on: Sep 7, 2012 at 15:20 IST

I think the author is not practical. Who cares about the stability of economy, environment and future. All we want is the vote and to stay in power.It's very easy to not to hike the fuel price and not to loose few votes rather than to act sensibly. When the majority of indian voters never care about these things why should the politicians needs to care about. Afterall if the India becomes a bakrupt country they can easily settle in swiss alps city with the enormous wealth they have deposited in swiss banks.If I am a politician, in the current indian atmosphere and wants to be practical I would further subsidise the fuel and bankrupt the country for a short term political gain.

from:  R.Manivarmane
Posted on: Sep 7, 2012 at 15:08 IST

(1) Price increase has become inevitable, considering the bulging oil imports and scarce foreign exchange. It is simply not wise to de-link prices of petroleum products from international crude price. (2) Obviously, we need to devise a well thought strategic plan to deal with continuous rise in crude price. (3) Current policy of increasing only the petrol price in fits and starts should be replaced by a rational approach to pricing of all petroleum products. (4) It has been proved beyond doubt that supplies of kerosene, and as pointed out in the article, of food grains meant for public distribution do not reach the intended poor families. But the state governments are continuing the same policy for years and have allowed the black marketers to make money at the cost of poor and the taxpayers. Therefore we have to find out how to help the poor by way of assured supply of both food grains and kerosene.

from:  Narendra M Apte
Posted on: Sep 7, 2012 at 14:53 IST

I support deregulation of petroleum products but before this
alternate of petroleum should be available in cheaper rate.
I don't know, what happened to our leaders they just think about
themselves. We all knows petrol(petroleum products) is the biggest
weakness of our economy and why they are not investing in searching
substitute of it. Govt. should invest in huge amount on developing
technologies like cheaper solar cells, make hydrogen energy feasible
for auto. Make good team of scientists and bureaucratic to develop
alternate source of energy and make them cheaper. How much time it
will take 10 -15 or 20 years to develop technologies and support
them. But they don't want to develop otherwise their politics will
not run. Everything substitute is available but it should be
affordable to common man, it should not be like this segment of
people can bear increase in prices etc.

from:  Amit Bondwal
Posted on: Sep 7, 2012 at 14:47 IST

Its time the government starts doing away with the fuel subsidy to keep its expenses in check. With respect to deisel, the diesel used for agricultural purpose should still be subsidised and diesel for automobile should be deregulated. The use of colour markers can very well differntiate both of them and prevent their misuse as well. Say Yellow for automobile diesel and Blue for subsidised diesel. In the case of LPG, i feel the subsidy should continue, atleast for now. This should encourage more people to switch from wood to LPG as the fuel for cooking. And in case of kerosene, I would support deregulation. From the environmental point of view, it is better that people start exploring cheaper and non polluting sources to replace kerosene.

from:  Vijay Seshagiri
Posted on: Sep 7, 2012 at 12:45 IST

Our govt has been spending crores of rupees to subsidize 3F's food,fuel and fertilizers.unfortunately,the real purpose of these subsidies deviating its route,it is not protecting whom it ought to protect rather encouraging black market to grow. if policy is correct implement it strictly, if wrong find out viable and feasible mechanisms which should push and balance both economic prospect and social equity in a sustained manner of our country

Posted on: Sep 7, 2012 at 12:22 IST

We as the public of the country always look for subsidy in the regulated products,on the other hand the money government put for this
can be certainly used in some productive works and than probably the
word subsidy will not be required. Every time there is rise in the
price of daily needed products like kerosene,Diesel,LPG etc;it becomes
a matter of political havoc.But do we really need to increase the
price of such commodities or give subsidies on them if proper cash
transfer is done?May be not because the political myth that by subsidizing the daily need will impart less burden on "AAM AADMI"is
wrong.Instead if funds distribution is channelized every one will earn
enough that no regulation is required.Also along with this awareness
for the proper utilization of resources is very necessary.Well nice
and thought provoking artical............

from:  Mayank Kanga
Posted on: Sep 7, 2012 at 12:08 IST

Great article. I am totally agree with author. India is not in a
position to give huge subsidy on LPG. India imports 75% of its total Hydrocarbon demand form other HC rich countries. So, if global price
of crude or Natural gas are rising, then we also have to raise them
LPG is not a AAM AADMI's fuel, then why should we give such a huge
subsidy on this??

from:  Anil kumar
Posted on: Sep 7, 2012 at 11:57 IST

What a shameless Congress Government is!!!! Whenever Price of common man utility has to be hiked, the our honorable PM stand Rock Solid by stating that we can't low the prices/taxes and all bullshit but When they have to disclose the black money holders name or have to act against their corrupt leaders he says... " hazaro jawabo se meri khamoshi acchchi..." Shame, shame, shame..!!!!

from:  abkuamar mumbai
Posted on: Sep 7, 2012 at 11:33 IST

The imminent price hike will dealt a heavy blow to the incumbent UPA
government. UPA II has shown a complete mismanagement of the national
exchequer despite a reputed economist leading it. How can the
government justify giving away of scarce natural resources such as
spectrum, coal at dirt cheap prices when it can be clearly seen that
it is due to these maligned practices that these drastic steps -
especially the diesel price hike which will hugely fuel inflation- are
being taken to support the tumbling exchequer. Clearly the coming days
are going to be an acid test for the government.

from:  Anubhav Modi
Posted on: Sep 7, 2012 at 10:07 IST

Bravo! when whole world is talking and discussing about the rising oil prices ,you are talking to reduce subsidy ,to aggravate the situation in India. you must be a more genius then those who are talking on CNN and BBC. Or perhaps you haven't studied the Indian economy thoroughly .Where oil price plays very important role. Money of Subsidy is not the treasure of the government but the taxes payed us. You have mentioned about the Mercedes and SUVs ,how many people in India have SUVs. Also you have mentioned report from a British agency, why not from UNO or FPO.Perhaps that wouldn't suit you. Its clear from you article that ,you are talking about only interests of few people and most of your datas are only theoretically right. Please do some ground work.

from:  narsingh
Posted on: Sep 7, 2012 at 09:50 IST

The sub column "Poor Person's fuel" rightly mentioned to substitute
the use of petrol with kerosene by auto-rickshaws drivers if the
prices of kerosene remain unchanged causing increasing level of

But keeping in mind the fact that if the rates are increased it
could lead to heavy burden on the poor who use kerosene for
lightning and cooking, its a tough decision. But the option of
giving payout to poor people is not a great option equally.

Few observations:

1. The money would not reach the masses properly as mentioned in the
article that the leakage would be higher. The same statement was
given by then Hon'ble prime minister Rajiv Gandhi in 1980s, "I a
ready to spend 100 even if 15 in 100 reach masses". Even in 1980s
there was so much of corruption, nowadays so many scams are coming
in light every day.
2. Even if money reached to public, it could be short term and in
the long term, the policy may change and the prices will not fall.

Poor will suffer the burden.

from:  Nitin Mittal
Posted on: Sep 7, 2012 at 09:36 IST

What a government we have? They can gift mobiles to poor but can't subsidize the poor man fuel. Are they going to cook food from Mobiles?
Government should try to improve the condition of Public Distribution
Systems and provide subsidy to their essential commodities.

from:  Vikash Bharti
Posted on: Sep 7, 2012 at 08:05 IST

This attitude of manageable price increase and in all walks of life is the cause Indias
chaos and anarchy. As a matter of fact NECESSITY should transcends Thoughts into
vison of action. What action can you expect from 84years PM and

from:  Nitin N Varia
Posted on: Sep 7, 2012 at 07:23 IST

Fine article, easy to read. One shoule apply the principle of Psychology in every field: increasing the price of fuel by, say 50 paise, for a long period of time on a monthly basis will not affect the people that much as compared to raising it instantly by, say 2 rupees. I agree with the writer that fuel subsidies should be done away with and yet keep the poor safe from the ill effects by providing cash transfers.

from:  Aiman Reyaz
Posted on: Sep 7, 2012 at 07:04 IST

Your analysis is correct, but does the government have the guts to bite the bullet? I say this sadly, but Indians - even the middle classes - love government subsidides. Of course, there will be a couple of trolls who will claim that there is enough black money, which if bought back which can finance the subsidy. Anybody with brains knows that this is not feasible.

from:  Anuj Shah
Posted on: Sep 7, 2012 at 02:45 IST

It is only a myth that by subsidizing fuel the Government is taming inflation.infact
the Government is not honest in being traspatent in this sector which makes them
more difficult to act. Every time they take a decison or formulate a policy but never
followed by action. In principal a decison was taken long back to deregulate diesel
which the government have not acted upon. Infact by keeping diesel prices 50%lower
in India than in Pakistan you are literally encouraging smuggling of. Many goods to
Pakistan. The person responssible for this policy faileur is Shri Pranvda who have
been stalling any right decison on economic front inanticipation of political back
lash. Its time Shri Pranab da's role as As FM be investigated by CAG and you can be
sure a scam of economic paralysis leading to chaos in economy will surface.

from:  Nitin N Varia
Posted on: Sep 7, 2012 at 02:27 IST

"LPG is generally used by the better-off in urban and peri-urban areas, many of whom can bear an increase in price. Around half the country’s total population never buys any form of commercial energy, not even wood, which is the most used fuel, and thus a LPG price hike does not affect the masses." -- This statement is not correct. LPG is used in town in large scale. Buying wood is neither easy not cheap these days. Villagers do rely largely on wood but this is not the case in town. Availability of wood is scarse and thus it is costly unless there are lot of jungles nearby.

from:  Dilawar
Posted on: Sep 7, 2012 at 01:02 IST
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