Need for a Transformational Change in Fuel Policy not Random Pricing, Rationing, Inefficiencies and Corruption

As always the news of fuel price hike was met with much criticism across the political aisle including those of the ruling government's alies while social media was abuzz with creativity in showing the effects of such a hike. My favorite was a marketing pitch for petrol sachets.

Keeping the criticism of the masses and my personal belief that government must get out of industry keeping no role to play in setting fuel prices aside, increasing diesel prices and reducing excise on petrol was for once a sensible decision taken by the government.

I broke down the cost of petrol in my earlier blog (Read Here) - c. 40% of the retail price of petrol is made up of Cental and State taxes. These high taxes on petrol have long been put justified in the disguise of cross subsidizing diesel, kerosene and LPG. This cross subsidization however serves no purpose. Cheaper diesel has led to proliferation of diesel run passenger cars and SUVs cuasing unreasonably high consumption of diesel. Diesel as we know is an extremely high polluting fuel compared to petrol. Kerosene on the other hand has been rampantly adulterated with petrol causing engine and environmental damage while creating another avenue for black money in the system. Reduction of central excise on Petrol by 5.3 a litre is therefore a step in the right direction. Increasing the price of diesel is certainly going to lead to a slight jump in inflation across the board but we cannot always escape the hard reality of global markets where crude prices have jumped more than 30% in last 3 months due to speculation and middle east uncertainties. 

Only way to manage price stability is for the oil companies to effectively and opportunistically use hedging instruments which would never happen as long as they are government owned and dont have any incentive to improve efficiencies and compete in an free market environment.  

Turning to no price hike in kerosene - in a fractured coalition and messy democracy like ours, it is more or less blasphemous to expect an increase or rather rationalization of kerosene prices. Black marketing of kerosene has become so intertwined with the corrupt political system and bloated bureaucracy that no one would ever dare plug the spigot that feeds politicians' and middlemen's Swiss accounts. Narasimha D Rao of 'International Institute for Applied Systems Analysis' concludes in 'Energy For Sustainable Development' March 2012 issue, 'kerosene subsidies are regressive and of minimal financial value to poor rural households. This is in part because household quotas are based on cooking needs, but kerosene is used predominantly for lighting. In urban areas, subsidies are progressive, and provide benefits of up to 5 to 10% of household expenditure among poorer households which lack affordable access to LPG and biomass. Overall, only 26% of the total subsidy value directly reaches households'. Another study was more liberal to the government and mentioned c. 40% of kerosene is stolen and never reaches intended beneficiaries.

Based on this, kerosene subsidies are the biggest and longest running scam India has ever seen still going strong. Based on mid point of this 74% and 40% loss estimated by the two studies mentioned earlier and last years subsidy of $4 Bn, here is $2.3 Bn in corrupt money warming politicians/middlemen pockets annually.

I dont want to sound an environmental activist here but common sense thinking would suggest a better policy would be to give intended beneficiaries access to cleaner cooking and lighting options than subsidize what is quite clearly the most inefficient, environmentally disastrous and unhealthy option.

The decision to limit LPG cylinders at subsidized rates to 6 per family however was an antiquated and intellectually bereft decision that one has compromised to expect from this government headed by a renowned technocrat. A two tier pricing structure often leads to a black market. Indian scam-artists' and local politicians' ingenuity would right away lead to a flood of bogus gas connections and quota on those bogus connections would make it to genuine middle class families at 600 a piece compared to the full priced 750 cylinder. Families would be waiting for a long time to get their subsidized cylinders while the 600 a pop would be available instantly. So wait and watch as this latest experiments makes many millionaires while housewives tackle yet another complication in their already stretched tiger mom inspired life.

I would prefer a policy that eliminates all the subsidies on LPG, petrol, diesel and kerosene in return for elimination of import duty on crude, reduction in all central government taxes to the minimum bracket and incentive to private sector to invest in building pipelines and efficient refineries. Inefficient refining adds c. 1.5 a litre to price while inefficient trucks based transport and vested interests in dealer network and marketing adds another 4 bucks of inefficiencies. I would have added investment in public transport to this wish list as well but that would make me an eternal but naive optimist. The wish list above makes me more or less an enemy of socialists but keeps me among sane eternal optimists nonetheless.