The diesel price hike gives the correct signals

Written by Yoginder K. Alagh | Updated: Feb 14 2013, 10:04am hrs
The diesel price hike is a major step in the right direction, giving appropriate price signals, reducing infructuous subsidies and hopefully leading to a much needed fillip to productive investment in public infrastructure. It is well known that a substantial part of the subsidy is diverted to the black market by criminal elements. A senior Mumbai journalist was killed by elements who reportedly did not want his story on the diversion of tankers on the high seas to appear in the news. At first, diesel was taken on black prices from pumps, then road tankers were diverted and finally ships were diverted.

The notion that diesel demand is perfectly inelastic is wrong. We know that in the mid-seventies, when India followed a high energy price policy after the first energy shock, POL demand was stagnant and the country is regarded as having been very successfully in fighting the crisis. The price of an input is a cost but it also gives a signal for the resource use and that will have salutary consequences, including for the environment.

There are two aspects that need attention. Every fuel policy report from the Chakarvarty Committee onwards, some of which I have worked on, has asked for the rationalisation of diesel prices. One aspect is the provision of cooking energy in the hill areas because kerosene will be substituted by the cutting of down trees. A well-targeted Aadhaar-based supply of the fuel to these small but important populations is needed. A recent version of this is there in the Planning Commissions Fuel Policy Report reportedly accepted by the PM. The second issue is that support to the agricultural sector has to incorporate the impact of this hike.

Finally, we may like to note the positive signals rationalisation gives for private investment. When kerosene and LPG prices were rationalised in September, I was travelling to two major global financial centres on invitation from a global financial consulting group to meet their India investor community. I knew of some reform coming, but their interest was extraordinary particularly on the political aspects. At that time, they were sceptical of India, talking of a hard landing for the country. I told them that the politics would be managed and that this would lead to more Indian-style non-big bang reforms and hence Indias growth would be closer to 5.9% rather than 5% being projected then. These men who manage billions have been sending messages since and the IMF has now given its 5.9% estimate.

In areas where electricity distribution is reformed, the impact will be less. For example, it is extremely unlikely that commercial establishments in Ahmedabad are diesel intensive in their operation. Private electricity companies in Ahmedabad and Surat give fairly reliable power and, although power is very expensive compared to elsewhere, there is very little dependence on, say, gensets using diesel. For example, power looms in Surat and Bhiwand in Maharashtra, where power is also privatised, largely depend on electricity. Of course, this is not true in other towns. India is a relatively inefficient user of diesel energy. Less now, but there is still a large application of freight equalisation. Since the commodity is available at all locations at the same price irrespective of the point of production, there is no incentive to save on transport. This is true of, say, grains in which the purchase and sale prices are the same all over, giving disincentives to poor deficit states. As chairman of APC, I had recommended that transport costs must be taken into account in grain pricing as they are real costs and ignoring them hurts poorer states and poorer farmers, but this was not accepted. Also, since hydel and nuclear sources are few and power supply is erratic and the deficit high, there is excessive dependence on diesel energy for traction and dependence on non-rail transport.

In an inaugural speech at The Indian Econometric Conference published in the Societys journal, I had shown that for 2020 in a business-as-usual scenario, oil consumption and imports would be around 10% higher as compared to an efficiency scenario. The sooner the price hike puts us on those paths the better off we will be.

The author is a former Union minister