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Monday, June 11, 2012

Diesel Subsidy & Inflation – What is the remedy?



Diesel accounts for India’s 55% total crude  consumption and the   under-recovery on diesel is around Rs. 11 per liter- this means OMC (Oil Marketing Company) which control 87 % of domestic oil market ,suffer a loss of Rs. 11 on the sale of each & every  liter of diesel.

But, how OMCs can sell diesel at loss?

And the answer is the diesel price regulation by the Indian government.
Indian government regulates the diesel price as it is used in agriculture (as a fuel to run tractors and pumps) and transportation (goods and public) and raising the diesel price shall increase the inflation.
OMC shares this subsidy burden with upstream companies and the government. When government compensates the OMC fiscal deficit shoots.

Sometimes government issues oil bonds to these companies that can be redeemed after some years but cash-starved OMC pledge these bonds as security to garner loans with the financial institutions.
The government issues these bonds without backing it with any collateral assets and this is indirect way of money printing i.e. increase of the money in the economy.
When money in an economy increases overall inflation increases. This means, the cost of the diesel subsidy is borne by the innocent people who never use diesel directly.

Who takes the advantage of  subsidized diesel?

Subsidized diesel is availed by many non-worthy users who uses too.



     (1)    Private Diesel cars & SUVs (Special Utility Vehicle):  
     
     As petrol is now around 75-80 % costlier than the diesel, more and more people are flocking for the diesel cars. Though government is mulling over hiking the excise duty on diesel cars but so far it could not muster the courage for the same. Automobile companies have taken huge loans from to expand the diesel car-manufacturing capacity and any hike in the excise duty on diesel cars may jeopardized their profitability and might result in their inability to repay the loans which shall further ail the banking sector.


      Is hiking the excise duty on diesel cars will be viable?

     (2)    Telecom operators: 
      In India, there are around 5 lakh (.5 million) mobile towers and around 60 % of these towers run on subsidized diesel as they are not connected to the electricity grid. At least government should sell diesel at its cost to these companies.

      (3)    Transporters: Goods and public transporters are the genuine candidates to avail the subsidized diesel as any burden caused by the rollback of subsidies shall increase their operating cost and when they shall pass this on the consumers, headline inflation shall rise.

      (4)    Agriculture: Indian is monsoon-dependent agricultural nation and 60% of its population is employed in the agriculture sector. Only Poor famers should be allowed to avail the subsidized diesel.

      (5)    Industry: Industries should be encouraged to use the CNG which is more efficient and less polluting.

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