I subsidize a Merc owner!!!

Have you ever wondered why Diesel costs lesser than Petrol in India?? Is it because it is cheaper to produce? Or is there more Diesel than Petrol in the world?? No… the answer can be found elsewhere! Diesel has traditionally been priced lower than petrol to keep costs in general low (ie inflation low).

Diesel is used for transportation by road (both people and goods). Diesel is used by Indian Railways. Diesel is also used a lot by farmers for running all the irrigation equipment like tractors, pumps, crushers, etc.

Diesel is the most subsidized fuel in India. For instance, Fortune 500 company Indian Oil Corporation is losing Rs 243 crore daily of which diesel’s share is Rs 127 crore, followed by kerosene at Rs 75 crore, LPG (Rs 11 crore) and finally petrol (Rs 11 crore). This is also due to the fact that diesel accounts for more than 40% of India’s petroleum product consumption. But the crux of the matter is that companies are making huge losses by selling diesel at the current prices.

The under recoveries per litre of Diesel is higher than the under recovery on a litre of petrol. The above fact is also evident from the fact that Reliance Petroleum is exporting its diesel, since it cannot afford to sell it at a loss locally like the oil Public Sector Undertakings (read as HP, BP, IOC, IBP, etc). Shell for instance sells diesel and petrol at almost the same price in India.

A quick look at the diesel and petrol prices in two leading economies (US and UK) reveal a different picture all together.

United States: It would be interesting to note that since September 2004, the price of diesel fuel has been generally higher than the price of regular gasoline (petrol) all year round in the United States of America. As on September 1, 2008 a gallon of diesel was priced at US$ 4.12 and a gallon of gasoline was priced at US$ 3.68. (Source: Energy Information Administration – Official energy statistics of the US Government).

United Kingdom: As on date a litre of diesel is priced around GBP 1.24 and a litre of petrol is priced around GBP 1.12. (Source: www.petrolprices.com)

It is true that high diesel prices create inflationary conditions. So, if the government really wants to subsidise diesel… cant there be a better way whereby only the deserving get the subsidy?? The point I am trying to make is why should the government subsidise a person owning a car costing more than Rs 20 lakhs or even Rs 8 lakhs?? It is funny that a person owning a Maruti 800 or a Tata Nano in future would be subsidized lesser than a person owning a fancy SUV say a Audi Q7 or a Mercedes!!!

By looking at other countries which subsidies fuel used for public transport and farm equipment, the Indian government can learn a thing or two. For instance, in Ireland, businesses are allowed to claim back the 100% of the VAT on diesel but nothing for normal petrol while in Portugal, the amounts are 50% for diesel and 0% for petrol.

Or the Government could consider selling diesel for cars and diesel in cities at a different price (Dual pricing as it is called). But in case of duel pricing, our black marketers or innovative Indians, could end up with plans for obtaining the public transport diesel for private consumption or worse start buying trucks as caravans for private use!!!

Dual pricing is something I have been speaking with all of my friends. Anyone who has discussed petrol price with me will have heard me talk of dual pricing. It is heartening to see a press report which suggests that the PM wants to introduce dual pricing.

Untill any of the above happens; I will continue to subsidise the running expenses of a rich kid owning a diesel car which costs more than my petrol car!!!