Why diesel subsidy should be removed for all

As it is, most state transport corporations are incurring huge losses; making their principal input more expensive, compared to that for private transporters, has only worsened the situation. In the final analysis, the tab for it will have to be picked up by the taxpayer.

Petroleum Minister M Veerappa Moily has said that the supply of subsidised diesel to state transport corporations will be restored soon.

In January this year, with a view to cutting the subsidy on diesel, the government had decreed that all bulk users, such as the railways, state transport corporations, armed forces and all commercial establishments, would be charged the market price for diesel.

Retail consumers, however, would continue to get diesel at the subsidised price, though the price would be raised by a small amount every month till the subsidy gets wiped out.

This resulted in a highly undesirable and distortionary dual-price regime, even as all attempts to contain the fuel subsidy bill went haywire with the spurt in global crude oil prices and the depreciation in the rupee vis-à-vis the dollar.

And, like in any other dual-price regime, consumers devised ways to circumvent the rule: bulk buyers like commercial establishments and many state transport buses began buying diesel at retail stations.

The purpose of the exercise was defeated; it made the distortions in the existing petroleum product pricing regime worse.

It also led to a peculiar situation where state transport corporations bought diesel at higher prices compared to private transporters.

This seriously disadvantaged them. There is no rational ground for this.

Such steps only serve the purpose of out-pricing public services provided by the government.

As it is, most state transport corporations are incurring huge losses; making their principal input more expensive, compared to that for private transporters, has only worsened the situation. In the final analysis, the tab for it will have to be picked up by the taxpayer.

In that sense, the decision to bring state transport corporations back to subsidised fuel must be seen as being aimed at removing a distortion, not a regressive measure.

Ideally, the subsidy should be removed for all; but so long as it is there, it is wrong to exclude one set of users from it. In this case, it happened to be state transport corporations, which cater to the poorest sections of society.

The second anomalous situation created by the dual-price regime was with regard to the railways: it seriously dented their position vis-à-vis road transporters for both cargo and passengers.

Earlier, it would make sense to transport goods by road for distances of up to 400 kilometres; now, since road transporters get cheaper diesel compared to the railways, this advantage has only got better.

What Mr Moily’s latest proposal does is that it takes state transport corporations out of the disadvantaged lot and puts them in the company of the advantaged lot, leaving the railways behind.

The dual-price regime must be removed.

If there is a subsidy on diesel, it doesn’t make sense to exclude the railways.

The logic of subsidised fuel for state transport corporations works for the railways too: both provide a public service, often to the disadvantaged sections.

Ideally, diesel subsidy ought to be removed for all categories of consumers.