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Diesel subsidies benefit the haves more than have-nots -Ramkrishna Kashelkar
-The Economic Times

MUMBAI: Soaring diesel consumption by fleet owners, telecom companies to keep their towers running and malls to pamper their affluent customers is blowing up the theory that continuation of diesel subsidies is intended to help farmers and truckers in order to keep inflation low.

Diesel consumption is growing at a rapid pace that is lining the pockets of the business community rather than the government's intention to help poor farmers and truck owners which are mostly individual businesses rather than companies.

The continued subsidy could lead IOC and HPCL to a financial crisis that will raise the burden on the government in future to save them from going bankrupt like its bailout for Air India.

"A good portion of the diesel subsidy is used by sectors where it is not intended to be spent," said Debasish Mishra, senior director, Deloitte India. "Nearly Rs 8,000-crore subsidy is consumed by power generating sets in malls and big buildings while around Rs 3,000 crore of subsidy is spent in powering telecom towers."

Nearly 16% of diesel is consumed by passenger vehicles, 4.6% by gensets and 2% by mobile towers, translating into a likely subsidy of Rs 23,000 crore for this fiscal, a calculation by ETIG shows. In the April-July 2012 period, India's diesel consumption grew 10.9%, although the total petroleum consumption was up just 6.2% underlining the overall trend of economy's dieselisation.

The Indian petroleum industry is set to suffer under-recoveries exceeding Rs 1-lakh crore on diesel alone for FY13. Continuation of diesel subsidies has become sensitive for investors and the political class as it is creating a crater in the government's finances where fuel subsidies are set to touch a record high this year.

Subsidies, intended to keep the cost of operations low for farmers and truckers, are being enjoyed by the rich who drive around utility vehicles produced by Mahindra & Mahindra and Toyota Kirlostar, the top-selling models. There have been many recommendations, including one by the Kirit Parikh Committee, to free up fuel prices.

"The increase in under-recoveries can also be attributed to increased consumption of regulated fuels like diesel by private car owners due to a significant difference in prices compared to other alternate fuels like petrol," says Rahul Prithiani of ratings firm Crisil.

"The difference between the running cost for a petrol car vis-a-vis a diesel car has gone up by nearly 85% in the past 7-8 years. Therefore, diesel cars have become more lucrative for buyers." The proportion of diesel cars in total car sales has increased to 38% in 2012, from 20% in 2006, which has pushed up the share of diesel in the overall petroleum product consumption to 44%, from 36%.

Policymakers have been debating about many ways to continue with subsidies and eliminating the undeserving from benefiting because of the scheme. "In India, nearly 80% of diesel sales happen through retail outlets," says a director at Petroleum Planning and Analysis Cell under the petroleum ministry, who did not want to be identified.

"There has been no tracking mechanism to check the final usage of diesel sold through petrol pumps. The estimates we have are based on dealer feedback. Still, there is no doubt that the diesel consumption is growing in areas where subsidies are not justified. We plan to conduct a scientific study over the next one year to establish the consumption pattern with more clarity."

But the damage to the country's fiscal position and oil companies' finances may well be done before a mechanism is evolved. The under-recovery on diesel — the shortfall between the domestic price and what it would have cost to import — contributed to merely 44% of the industry's overall under-recovery in fiscal 2011, but rose to 58% in the following year.

In the first half of this year, it was at 60.7%. Oil companies are losing Rs 13.76 per litre on diesel. If things continue at the same rate, the under-recoveries on diesel alone will cross Rs 1-lakh crore for FY13, provided the year's consumption volumes stay restricted to the projected figure of 68.5 million tonne.

If the diesel consumption maintains at the 10.9% growth rate seen in the April-July 2012 period till the year end, this figure may cross Rs 115,000 crore, according to ETIG estimates.

If the subsidies are not ended, it is trouble for the government. "The government will be left with no option but to borrow additional funds to compensate OMCs during the year, thereby adversely impacting the government's fiscal position, assuming other factors remain constant," says Crisil. "This, in turn, could exert further upward pressure on interest rates and will also limit the government's ability to fund critical social and infrastructure projects."