The government's move to decontrol diesel prices is forcing India to rethink the way it uses fuel
The laws of economics say that the demand for any commodity goes down when its price rises. There are substantial exceptions to the rule in India (real estate and gold) but it holds true by and large. This doesn’t seem to be happening at Worli Way Service Station, a fuel station at a busy junction in downtown Mumbai. Diesel prices went up 45 paisa on every litre a few days ago, yet, claims Rajeev Matoo, the owner of the station, sales have climbed 12 per cent. It’s not difficult to see why. Apart from the vehicles that come for refueling, tempo trucks from local offices, construction sites, malls and hospitals, carrying blue plastic barrels, arrive at regular interval to collect diesel. A hose comes smoothly down from an overhead dispenser and fills diesel into the 200-litre barrels. The trucks then leave for their destination, usually in Worli, Mahalakshmi or Byculla.
“We don’t know what the end use is for every customer. It could be for bulk consumption,” says Matoo. This is the immediate fallout of the government’s decision to stop fully the subsidy on diesel for bulk consumers, and to give state-owned oil marketing companies (Indian Oil, Bharat Petroleum and Hindustan Petroleum) the freedom to raise retail prices in small doses every month. The first rise has been of the order of 45 paisa per litre. If future increases are of the same magnitude, the current subsidy of Rs 9.25 on every litre of diesel sold will get fully wiped out in 21 months. Till that happens, there are two prices: a higher one for bulk buyers and a lower one for fuel stations. In Mumbai, the difference is Rs 11.62 a litre. That’s what’s driving bulk buyers to Worli Way Service Station. (Fuel stations are free to sell any quantity of diesel loose to anybody; all they need to check is that anybody buying more than 2,000 litres has a secure storage facility.)
Cut to Agrasand, a village of about 300 households in Barabanki district of Uttar Pradesh. A pucca road takes you into the village. Almost all homes have power connection and cooking gas. Farmers here grow paddy in summer, wheat and mustard in winter, and potatoes round the year. These crops cannot survive without water, and the villagers use diesel-run pumps to draw underground water and irrigate their fields. They also need diesel to operate their tractors. All told, the village buys 200 litres of the fuel every day from Jaishree Filling Station (of Hindustan Petroleum) located four kilometres away on the highway that connects Lucknow to Faizabad. The villagers are aware that it’s a matter of time before diesel becomes prohibitively expensive. Coupled with the sharp rise in the prices of some fertilisers, this threatens to seriously erode their incomes. “Agriculture,” says Mahendra Kumar, a farmer, “is increasingly getting difficult and unviable.”
Jitendra Maurya, another farmer, says he wouldn’t mind spiking diesel with kerosene to run his water pump. That’s because he gets 2.5 litres of kerosene every month from the ration shop for Rs 50. By mixing it with diesel (Rs 50.79 a litre), he can reduce his fuel bill. But the pump needs one litre of fuel every day; Maurya then will have to buy kerosene from the black market at Rs 45 a litre. “We know that kerosene adversely affects motor engines, but we will have to do this to keep costs down,” he says.
The government’s bold decision to decontrol diesel has set in motion monumental changes in the country’s fuel economy. So long as diesel was inexpensive, users seldom looked at other options or took serious steps to improve efficiency in usage. Introspection has set in amongst all affected parties: car buyers (Should I still pay a premium for diesel cars?), car makers (Will buyers revert to petrol cars?), private fuel retailers like Reliance Industries, Essar Oil and Shell (How do we capture the market from PSUs now that the playing field has been levelled?), state-owned fuel retailers (How do we hold on to customers?), the Railways (How to control the diesel bill for running its 4,000 locomotives? Each consumes 600,000 litres a year. The Hindustan Times has reported that a Canadian advisor will help convert 2,000 locomotives to LNG over five years.), state transport corporations (These are bulk buyers, and now need to pay substantially more for diesel. Gujarat has told its buses to fill their tanks at retail stations and save money.), telecom service providers (How to economise on the use of diesel for running their 350,000 mobile telephony towers across the country?), factories in power-deficit areas, hospitals, shopping malls, hotels, restaurants, housing societies, farmers — almost everybody.
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Tamil Nadu is a throbbing industrial hub, yet it suffers from chronic power shortages. The state generates about 7,000 Mw, while the peak demand is nearly 12,500 Mw. This results in regular power cuts and load shedding across the state, which range from 2 hours to 14 hours. Industry meets this gap with the help of diesel power generators, though from May to October wind farms chip in. As a result, diesel has always been in high demand here. According to the latest data available, while growth in diesel sales was 10.3 per cent in the country during April-September 2012 (11.1 per cent in retail and 6.9 per cent in bulk), Tamil Nadu’s growth was 19.5 per cent (19 per cent in retail and 21.2 per cent in bulk). The import is clear: the state’s industry is running on diesel.
As it is, diesel-generated power is expensive. While power from the grid costs Rs 7 a unit in Tamil Nadu, power from diesel generators costs Rs 14-17 a unit. When Ashok Leyland’s foundry arm, Hinduja Foundries, was recently declared sick, one of the reasons was unsustainable power costs. The removal of subsidy for bulk buyers will make power more expensive. The consequences could be dire, unless users come out with significant innovations. Nissan and Daimler India Commercial Vehicles plan to use solar energy to power some of their requirements in the future. Apollo Tyres is proposing to set up a 15 Mw coal-based thermal power plant in its Oragadam facility near Chennai. This will help the company become self-sufficient in power for critical equipment. India Cements has invested in two coal-based power plants of 50 Mw each, one in Tamil Nadu and the other in Andhra Pradesh.
Few have an answer ready. The textile industry in Tamil Nadu, which accounts for over one-third of the total production in the country, directly employs over five million people, and earns over Rs 50,000 crore in foreign exchange every year, is at its wits’ end. S Dinakaran, chairman of The Southern India Mills Association, claims that spinning mills in the state have reduced their power generation (from diesel, of course) from 1,500-1,600 Mw to almost 1,000 Mw after the subsidy was removed for bulk buyers. The cost of producing yarn, he says, has gone up by Rs 4 a kg.
The story is no different in neighbouring Karnataka. For a hospital like Narayana Hrudayalaya in Bangalore, which is touted as a model in affordable healthcare, the increase in diesel prices for bulk consumers will hurt. “There is no power 10-15 per cent of the time; so our diesel consumption comes to 30,000 litres a month. With the new rates, our monthly fuel bill will go up by Rs 3 lakh,” says Viren Shetty, director of the hospital, and son of hospital founder Devi Shetty. At least part of this higher cost, he says, will have to be passed on to patients, though the hospital is taking steps to be as energy efficient as possible. Ask him if he would consider buying diesel from fuel stations and Shetty says: “We will buy it from where it’s cheapest.”
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According to industry experts, the rise in diesel prices could force some bulk users to shift to other fuel options like naphtha, light diesel oil (LDO), furnace oil (FO) and low sulphur heavy stock (LSHS). These prices were decontrolled earlier. But their demand has remained volatile. Whenever crude oil prices went up, and consequently that of naphtha, LPO, FO and LSHS, consumers would switch to inexpensive diesel. And when crude oil prices softened, consumers would go back to these fuels. That volatility could now go. “With diesel prices expected to skyrocket and move closer to petrol, some of the bulk users may be tempted to opt for other fuels like LDO, FO and LSHS for their boilers,” says Ajay Bansal, general secretary of the Federation of All-India Petroleum Traders.
However, most of the industrial units in Tamil Nadu rule out using these fuels, stating both cost and availability as the challenges. Moreover, some of these fuels have serious pollution implications. Deepak Mahurkar, who leads the oil and gas practice of PricewaterhouseCoopers, reckons that customers would prefer and refiners will be glad to offer these “not so clean” fuels (FO, LDO and LSHS) because these are less costly to produce. “They spend less by avoiding to bring down the sulphur content and other impurity further,” says he. It so happens, there are no norms for sulphur and particulate content in these fuels. In their absence, the refiner-retailers are free to sell whatever they produce.
C G Muthanna, vice-president (operations), Manipal Hospital, says using FO or naptha is not an option for him because the Pollution Control Board has restricted its use within city limits. Being heavier fuels, their maintenance costs too are higher. The group’s flagship hospital on Old Madras Road in Bangalore buys 17,000 litres of diesel a month from an Indian Oil depot, and from January 18, it has been paying the new rate of Rs 61.81 a litre. “We will absorb the higher cost to a certain extent but beyond that, it will have to be passed on to patients,” says Muthanna.
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The rise in diesel prices offers new opportunities for adulteration. In the past, adulterers freely mixed kerosene, naphtha and even water in diesel. While the government is conducting regular raids in this regard, oil marketing companies are demanding re-introduction of the marker system. Under that system, kerosene was given a blue colour; the kerosene would show up the moment someone used it as an adulterant. “Out of the total 41,971 fuel stations in the country, more than 27,000 have already installed automated servers, through which companies would be able to know instantly whether the fuel is adulterated,” Bansal says. This apart, at least 17 agencies are monitoring fuel stations for adulteration. Also, the government has quietly reformed the kerosene supply chain in the country over the last few years. The fuel is sold only through the public distribution system. The government has mapped areas that use cooking gas in large quantities and curtailed the supply of kerosene there. In Delhi, for instance, no kerosene is sold any longer. (As a result, the subsidy on kerosene has fallen from almost Rs 3,000 crore in 2002-03 to Rs 863 crore in 2011-12.) There is thus lesser kerosene available for spiking.
Welcome to a new world.
(Indulekha Aravind, Ranjita Ganesan and Aabhas Sharma contributed to this article)
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