The Broad Mind | The diesel dilemma

According to a recent notification issued by the Petroleum Planning and Analysis Cell, the under-recovery on sale of diesel during the period April-September 2011 was Rs 37,719 crores.

 Assuming a similar figure for the second half of the financial year too, the annualized under-recovery will be around Rs 75000 crores.

Here, the plot thickens. Around 15-20% of diesel sold in the country goes for start-up applications in power plants and for operating the thousands of stand-by generator sets that are used in shops, offices, residences, malls, commercial complexes and industries. The unintended subsidy passed on to all these consumers is around Rs 10000 crores per year.  The telecom sector- with its ubiquitous towers and cell stations- consumes around 2 million tons of diesel per annum on its stand-by generators and is a beneficiary of the largesse.

As the stated intention in under-pricing diesel is to prevent a cascading effect on price of essential commodities ( that can result if the transportation sector is asked to foot the entire bill), the question that arises is: What is the justification in extending the subsidy to other sectors? Why should private commercial complexes or malls be allowed the subsidy? And why the telecom companies that are hugely profitable and can do without the generosity?

A counter-argument is that it is the responsibility of the power companies ( almost all of them owned by Central or State Govt agencies) to supply reliable power on 24 x 7 basis. When denied this basic convenience, power consumers have no other option but to install and operate their own stand-by diesel generator sets. Even with the subsidized diesel, the cost of power generation comes to Rs 10-12/Kwh ( against an average of Rs 5-7/kWh if purchased from the Utilities). If they have to foot the entire cost of diesel, it would unfairly add to the burden.

As there is merit in both these arguments, the Govt, in all these years, has done what it is best at doing : Nothing. 

Let’s see what are the options open to the Govt, apart from wishing away the problem.

1)      It could remove the subsidy on diesel for all applications and index the sale price to the price of crude oil. That is, do away with the administered price mechanism (APM) currently in use.

This is what various committees have recommended. This requires political will- as the opposition parties being in ,err, opposition, will want to be seen championing the cause of the poor man, and will take political mileage.

2)      It could retain the subsidy on diesel sold to vehicles and selectively withdraw the subsidy on diesel for power generation, thereby saving Rs 10000 crores per annum. This poses some serious challenges in implementation. Diesel sold to bulk consumers such as industries and large commercial complexes can be billed at higher rates, but how do you control the sale of diesel to the owners of thousands of small generating sets who buy diesel from retail outlets?  No fool-proof mechanism can be devised to differentiate the two, and dual-pricing would lead to more corruption.

In the UK, where diesel for agricultural and construction activity has lower taxes, a dye is used to impart a distinct red colour to the fuel. Cars found using the ‘red diesel’ can be severely fined, but ‘cheating’ is not uncommon. In India, kerosene dispensed through PDS is coloured blue, but the system still suffers from malpractices.

 The only way to get out of this situation is by improving the power situation in the country, and render redundant the diesel-generating sets.  This is easier said than done, but to put things in perspective,  if Rs 10000 crores per annum is released into the system, it is good enough to cover the capital cost of a 2000 MW plant. And this can be added year after year.  

An additional sum of Rs 26000 crores per annum is lost as subsidy on PDS kerosene, 80% of which (according to some estimates) is used for lighting purposes in unelectrified villages. If this subsidy can be diverted to the cause of setting up efficient power plants, another 5000 MW can come up every year.

So, rapid addition of power capacities with gradual time-bound withdrawal of subsidy on diesel and PDS kerosene would be the desirable approach. This maybe a no-brainer, but still the only practical solution.


DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.