Learning lessons from Iran, Indian Government planning to remove subsidies on diesel. Elite car owners may have to shell out more for diesel

Lessons learned from Iran, Indian Government planning to remove subsidies on diesel.
Elite car owners may have to shell out more for diesel

Elite car owners may have to shell out more for diesel as fuel used in their cars if Indian Finance Minister Mr. Pranab Mukherjee accepts suggestions to tame inflation and control rising price of essential commodities.

Mr. Mukherjee while responding on a two-day debate in the Parliament (Lower House of Indian Parliament) on inflation and price rise, hinted that the Government of India may look at a dual pricing for diesel. Fifteen per cent of the diesel produced is consumed by passenger vehicles in India so the government might remove the subsidy on diesel for passenger cars.
The minister said, "High prices are there… Certain suggestions have come... but one thing to do... heavily tax those sectors which are not essential... out of 100 barrel of diesel… 10 per cent goes to industry... agriculture uses 12 per cent…. 8 per cent for power… 15 per cent for passenger cars where we can accept your suggestion and try work out that these sections are not subsidized…"

Because of huge difference in petrol and diesel prices, currently at Rs. 25 per litre, the share of diesel cars in overall passenger car sales has been increasing rapidly. Diesel cars currently account for 30 per cent of car sales and the analysts expect diesel car sales to hit 50 per cent by 2015.

In late June of this year, the petrol price has been hiked by Rs 5 taking the per litter cost of petrol is more than Rs 63 while diesel price prevailing at around Rs 38.

Business Today in its edition dated June 26, 2011 commented , “The reluctance of the government to increase the price of diesel has led to a strange situation - the demand for petrol cars is declining sharply. The argument that the common man will suffer if diesel prices are raised and hence only petrol should be made dearer is fallacious. There are at least 100 million motorcycle owners in India, a figure calculated on the basis of the last 15 years' sales. And despite four-stroke motorcycles in India offering incredible mileage, this price rise hurts users of bikes which have petrol engines a lot more than the middle class man driving the diesel-variant of the Maruti Swift”.

But, if the Government of India decides to increase the diesel price only at the petrol pumps (gas stations), it would only affect the elite class who can afford a car and can also afford to bear the additional burden of diesel price hike spearing the agricultural and industrial sections to continue to contribute to the nation’s growth.

The diesel price hike at petrol pumps would also not affect the common man if transportation sector is also waived off from this elite class. The increase of diesel price is having cascading impact on price rise of essential commodities. But if transportation sector has been kept out of this loop, there is no chance of price rise for essential commodities including food grains and perishable vegetables and fruits.

How to remove subsidies without hurting common man - Iran offered lessons. In Iran, prior to February 2011, a litre of petrol would cost the equivalent of Rs 4, while diesel would cost around 60 paise. Electricity was pegged at around 6 paise a unit (kWh). This made Iran one of the cheapest countries in the world by the cost of fuel and energy. All thanks to subsidies. But Iran has prepared a roadmap for itself. It has decided to phase out all subsidies over a five-year period. To minimise any shock on account of the increase in oil, gas and electricity prices, the first reduction of subsidies would have to be 20 per cent at the very minimum. However, Iran has managed to reduce subsidies by almost 50 per cent and with practically no protest from its teeming millions.

In November last year, former Environment Minister Jairam Ramesh said that use of Sports Utility Vehicles (SUVs) in countries like India is "criminal" adding the need for evolving an effective fuel policy regime to discourage the use of such vehicles that emit more carbons. "The luxurious growth of large-size vehicles like SUVs is really a growth of concern... use of vehicles like SUVs and BMW in countries like India is criminal," the minister commented which attracted a huge controversy.

Taking a cue from this line and forgetting the carbon emission from huge SUVs, it is true that these SUVs are consuming diesel and having fun which are subsidies from the tax payers money.