The Indian Railways is a profitable organisation. It earned a cash surplus of Rs 25,000 crore (Rs 250 billion) in 2007-08. In the current year, it is on course to earn a surplus of Rs 31,000 crore (Rs 310 billion), which will be substantially more than what it had targeted at the start of the year. Railway Minister Lalu Prasad deserves compliments for running a government organisation with reasonable efficiency and then earning profits.
Ironically for Mr Prasad, it is the Railways' sterling performance that is now being cited to argue that it has the financial muscle to pay the market price for the diesel it uses for transporting its goods and passengers. The Indian Railways' total spend on diesel at present is an estimated Rs 8,500 crore (Rs 85 billion) a year. The state-owned oil marketing companies have proposed that the Indian Railways along with other industrial users (like power plants, transport companies and industries) should pay for the diesel they use at a higher rate. The proposed increase is steep -- about 64 per cent, mainly because the oil marketing companies now sell diesel at a highly subsidised rate to all their customers.
The Indian Railways will have to shell out Rs 3,500 crore (Rs 35 billion) more every year (or a little over 40 per cent), if it is indeed made to pay for diesel at the higher rate suggested by the state-owned oil marketing companies. Even after paying for diesel at the higher rate, the Indian Railways will continue to remain profitable. But there are few takers for the proposal that will force the Indian Railways shell out more for the diesel it uses.
Clearly, nobody in the government, let alone Lalu Prasad, is worried by the huge losses the three state-controlled oil marketing companies will incur as a result of the rising crude oil prices. International crude oil prices may have fallen from the unprecedented high levels of $147 a barrel in July to around $104 a barrel now. But they are still way above the $70-a-barrel price that prevailed a year ago in August 2007.
So, the oil marketing companies' losses in the current financial year may not soar to as high a level of Rs 184,000 crore (Rs 1,840 billion) as feared earlier. But they will not disappear completely, either. In fact, the losses this year may still remain quite alarmingly high undermining their financial ability to even conduct fresh purchases of crude oil from the international markets.
The irony of all this is that both the Indian Railways and the oil marketing companies belong to the Union government. There are several examples within the government system where a state-owned company is asked to provide its goods or services at a specially subsidised price to another state-owned company because the latter badly needs that financial relief.
What financial relief the Indian Railways needs is not clear now, particularly when it has been earning cash surpluses for several years running. On the contrary, it is the oil companies that need some financial relief as they continue to bleed because the government has not allowed them to increase prices of petrol, diesel, liquefied petroleum gas and kerosene to fully reflect the rise in international oil prices. Almost half of the oil companies' losses is accounted for by the sale of diesel at highly concessional prices across the country and different consumer segments.
It is possible that in resolving such issues within the Union government, Lalu Prasad has got a bigger say than Petroleum Minister Murli Deora. As a result, the Indian Railways has become the UPA government's hot favourite while the oil marketing companies are being treated like orphans. But principles of natural justice and economics suggest that the Indian Railways should be made to pay the market price for the diesel it procures from oil marketing companies.
Not just the Indian Railways, even the state transport companies too should be subjected to the same norm of paying a market-linked price for the diesel they use. If the state transport units take an annual hit of Rs 5,000 crore (Rs 50 billion) because of the higher diesel price, let the additional financial burden be borne by the different state governments which run those services. Why let the state-controlled oil marketing companies bear the burden all on their own?
Almost three years ago, the UPA government came out with a formula to share the burden of higher crude oil prices among three entities -- the finance ministry (by reducing duties and by issuing oil bonds), the oil marketing companies by absorbing a part of the losses and the oil producing companies. It is now time to take a fresh look at that three-way formula.
If the government does not have the political will to pass on the entire burden of higher crude oil prices to the consumers, let it be shared not just by the finance ministry, oil producing companies and the oil marketing companies, but also by state-owned large users of these petroleum products and other bulk users like power plants. By asking the Indian Railways to pay a higher price for diesel will be a good way to launch this new formula.