Headless Hunch: Why Diesel pricing should have out of the box solution.

Recently UPA lead government overcame the biggest hurdle in reviving economic condition of India by straight increase price of diesel by INR 5/liter reducing its under-recovery to 10-13 INR/liter from one time high of 15-18 INR/liter.

The reaction to this announcement was as expected.  Opposition and ‘independent’ media, in name of common man, condemned it, while stock markets and majority of economist applauded it.  Personally, I think this was inevitable as UPA would not be able to pull this long considering the curren

t state of economy.  They played their cards well; with this diesel huge hike they definitely kept room for themselves, in case they need to do a partial roll-back under populist pressures.

However, I think it’s high time, we step out of our comfort zone and think innovate during such unprecedented circumstances.  Price hike was inevitable, due to subsidiary burden and fiscal deficit reaching around 6%.  However, the hike will work as catalyst to propel the inflation and will in short term will impact the economy.  So what is way out?  As usual, I juggled the thoughts and numbers to come up with this solution scenario.

Diesel Pump

OMC (Oil Marketing Companies), which includes mostly IOC, BP, HPCL have traditionally cried foul over the subsidiary payments and under recoveries in subsidized distribution, however, after lot of research I couldn’t found out any conditions on these companies to improve their refining margins.  Refining margins for these companies are almost stagnant for last decade.  This is high time when they should be held accountable for the inefficiencies in improving the refining margins.  Private players like Reliance and Shell have shown considerable improvements in their Refining margins with help of various tools, including fund hedging and different crude mixes.  Unfortunately Govt. held refining companies, have been working on with almost single kind of crude for decades.  Why the inefficiencies of government companies be compensated by way of government subsidiaries? Why these companies are not being pulled up for not improving refinery margins?  I think they should be made liable and bear up the losses for their inefficiencies.  I don’t have correct numbers with me, but I am sure over long term, this will bring down the under-recoveries by nearly 30-50%.

Coming back to practical approach on diesel pricing, we can divide the diesel consumers into four categories, (a) Cars including SUVs, private buses, small shops & apartment which use it for electricity backup, (b) Industries who consume truck loads of diesel like generators in IT companies or manufacturing, (c) Truck & Heavy vehicles which being used for transportation of goods and (d) Railways and public vehicles (State transport)

Out of above mentioned categories which require subsidized diesel is category (c) and some portion of category (b) users. Some time ago, we had a wonderful view of differential pricing which was negated due to the fear of the black-marketing and practical hindrance in implementation.  Let me first describe of the easy once that can be termed as ‘quick wins’    Category (b) industries generally procure the fuel directly from the OMC and thus can be charged at market rates (non-subsidized) and wherever they have subsidized requirement, equivalent tax credits can be provided on monthly/ yearly basis.

Now, category (d) Railways is biggest consumer of diesel and they also procure from directly from OMC.  They can like category (b) users be charged at market rates (Non-subsidized) and if government want to continue populist railway budget, Railways can be provided with oil subsidiaries via Rail Budget allocations.  Two benefits, first railways subsidiary bills can be accountable and their efficiency improvement can be tracked.  Secondly, government if wanted to maintain fiscal health policy criteria, will be forced to present genuine railway budget rather than current populist budget.  Similar story goes for the state transport vehicles, only funding medium will change from centre to state.

There is no doubt in my mind that category (a) users should be charged minimum at market rate (non-subsidized) and because still in India cars, specially diesel cars, are considered as luxury items, they should be charges extra via additional Road Tax and Excise Duties.  The argument will now arise that this will kill the automobile industry which is currently under pressure, blah blah blah…, so let me remind you, the ultimate aim should be to kill such industry which destroys environment and doesn’t invest in R&D for fuel efficient systems.  The saying ‘Necessity is mother of Invention’ will help the so pressured automobile industry to survive and if not, there are option of petrol, electric, CNG, hybrid cars.  Perhaps, we might find solar cars running in India.

Now let’s focus on final category, category (c) which represents Trucks and vehicles transporting goods. Fuel price rise in this, will have direct impact on cost of goods being raw material or finished goods and would directly contribute to inflation and hit every individual.  Thus it’s imperative that this category gets subsidized fuel. However, it’s virtually impractical to have differential pricing. So let this vehicle procure fuel at market price but implement the following:

– Reduce the excise duties to minimum: The reduction will have a loss on exchequer but can be mostly compensated by marginal hike in duties of car.  Again, number of cars sold is much higher then number of trucks sold, so by simple arithmetic solution, the hike in car excise duties would be marginal and help survive automobile industry.

– Reduce the road tax to minimum: Same as excise duties, road tax if reduced will help trucker save money and with same logic as excise duty, private car owners will not have to share hefty hike.

– Eliminate the State Permit:  Elimination of State Permit will ensure that the truck would be freely available to ply between any routes and any place.  This will also help truckers to quick move to profitable routes and competition will ensure that market correction will give optimum rates of transportation.  Unlike right now, permit costs would not increase the transportation cost and this move will be equivalent in monetary terms as subsidies in fuel cost.  Again, as there would be no state permits, the trucks would not get stacked at state entry check-post for a day or two, giving around 1-2 days more for trucker to earn.

The question will now arise that who will bar loss of State Permit charges.  Well these charges will be compensated by Centre on reducing basis over few years.  Post few years this would not be required as the trucker would be working more efficient and would be doing more rounds, they would deliver higher quantities of goods leading to higher VAT/Sales Tax/ GST collections.

Again, free movement of trucks within states, will create burden on the State Government to reduce the current taxes on diesel prices as truckers will mostly fill up the tanks where they get cheapest fuel.  So if trucker is making rounds between Bangalore and Chennai and if Chennai has even 10 paisa less fuel price, trucker will fill most of fuel from Chennai and thus Bangalore eventually have to reduce their prices (taxes) to compete with Chennai.

Again, this is my hunch on how to handle diesel scenario for this country.  But I am sure this one is also not full proof and requires lot of ‘consensus’, which in today’s narrow world hard to come by.  Still with all the positives, I am floating these thoughts for all intellectuals out here to read, comment and suggest some ‘out of box solution’ to this not so simple problem.