Although Prime Minister Manmohan Singh himself had said that state-run fuel retailers would be given pricing freedom for diesel too, the government could come under severe pressure to exempt one politically sensitive constituency ? farmers, who account for 12% of the country’s total diesel consumption ? from the decontrol.
This is because farmers who use diesel to run tractors, pump sets and tillers, are as much a sensitive community as the poor who rely on subsidised kerosene for lighting and cooking. In fact, larger farmers in states like Punjab, Haryana and Maharashtra can make a louder noise against any decision to take away the freebies they are enjoying than kerosene users who are an unorganised lot.
Punjab finance minister Manpreet Badal told FE: ?With diesel price deregulation, the cost of producing food grains will go up.? Badal suggested that if reforms in fuel pricing is not followed by reform in fixing food prices, farmers would be badly hurt.
?I am sure the government of India is thinking about reform in the petroleum sector, but they are also trying to keep food prices artificially low. Now, they should either deregulate food prices too or implement the Swaminathan committee formula of calculating minimum support price (MSP) as cost of production plus 50%. Food security is the biggest challenge facing any nation,? Badal said. Food inflation in the week that ended in June 19 close to 13%.
Punjab and Haryana together account for the bulk of food grain production in the country. The two states contributed more than 30% of the 80 million-tonne wheat output in 2009-10 and 20% of the country’s total rice output of 100 million tonne in 2008-09.
National Centre for Agricultural Economics & Policy Research director Ramesh Chandra said diesel price deregulation would invariably increase the input cost in agriculture for irrigation and tractor use. ?However, states can reduce the tax component on diesel to lessen the burden on farmers,? he added.
Once diesel is deregulated, some of the increased burden on farmers may be compensated by the higher MSP that the government gives on 25 farm products including rice, wheat, pulses, kopra and sugarcane.
Perishable items like vegetables are not covered under MSP, a mechanism aimed at giving fair prices to the farmer and at the same time to sell the produce in the market below the prevailing price. The ultimate burden would be on the consumer of farm products and not the farmers.
Trucks and buses guzzle nearly half of diesel sold in the country, far exceeding the farmers’ share of 12%. Passenger cars account for 15%, power generators 8%, industry 10% and railways 6%, say official estimates.
While the industry may switch from trucks to the more cost-effective Railways for freight transport, car owners may pay more for fuel or cut down on consumption ? the very purpose of doing away with the subsidy on diesel.
But protecting one class of users from price deregulation could lead to diversion of subsidised fuel for other purposes and could even potentially threaten the feasibility of such exemption. The government, however, has the option to keep the retail price of diesel the same for all users and give subsidy directly to the farmer using the unique identification system which is still being evolved.
C Rangarajan, chairman, Prime Minister’s Economic Advisory Council told FE that differential pricing at the retail level may not be feasible, considering the chances of diversion for non-farm use of diesel.
The Union government has already asked states to lower local levies on fuel. But they may be reluctant to do so considering that the Centre itself had restored basic customs duty of 5% on crude petroleum, 7.5% on diesel and petrol and 10% on other refined products, besides raising central excise duty on petrol and diesel by Re 1 per litre each in this year’s budget.
K Prabhakar Reddy, convenor, Consortium of Indian Farmers Association said Punjab and Haryana use diesel more (in agriculture), which is why they want to distinguish between farm and non-farm use of diesel.