But it wont lower oil prices

Written by fe Bureau | New Delhi, Feb 26 | Updated: Feb 27 2008, 04:28am hrs
Railway minister Lalu Prasad Yadavs announcement of a 5% cut in the freight rates for moving petrol and diesel is indeed an effort to bring back the oil traffic from roads to the railways.

The reduction in freight rate, announced as part of the Railway Budget proposals for 2008-09, is not sufficient enough to warrant any cut in the consumer prices of petrol and diesel. The freight rate cut will help the oil companies Indian Oil, Bharat Petroleum and Hindustan Petroleum save a meagre amount of less than Rs 50 crore annually.

The savings are too little to help any cut in the consumer prices of petrol and diesel. When oil companies are making a loss of Rs 6-7 a litre on sale of the two fuels (due to government cap on retail prices), it makes very little sense to cut prices, said a senior oil company official.

However, the cut in freight rates on the two fuels, coupled with the recent hike in petrol and diesel prices by up to Rs 2 a litre would definitely help the Railways get a share of the petroleum cargo transport business. The movement of petrol and diesel on rails is less than 40 % of the consumption of the two fuels together.

The rate cut would see cost of moving petrol and diesel over a distance of 100 km coming down to Rs 172.40 a tonne instead of Rs 181 currently. The rate for moving the auto fuels over 1,000 km would cost Rs 1,184.40 a tonne as against Rs 1,243.60 a tonne currently while doing the same over a distance of 2,000 km would cost Rs 2,131.80 a tonne as opposed to Rs 2,238.40.

It is also significant to point here that the price build-up of petrol and diesel factors in a notional 50% of the prevailing rail freight.

Therefore, the 5% reduction in rail freight will not have an impact on the price build-up as the new freight charge would continue to be higher than what is accounted for in the price build-up.