That the government’s refusal to rationalise the price of diesel in India is blowing a hole right through its Budget estimates for 2012-13 and its own credibility – leading to a further widening of the fiscal deficit and worsening of long-term inflationary pressure – is well known. Even a hike to take into account increased global oil prices has been endlessly postponed, and now it looks like it won’t happen at all, because of the weak monsoon. The generators used by farmers to power the tubewells that inundate their fields with groundwater are working overtime — and they run on diesel. Raising diesel prices, it is argued, would add to farmer distress, though of course the government has no problem somehow simultaneously claiming it can target drought relief through an additional diesel subsidy to affected farmers.
Given the fiscal cliff that India is heading towards thanks to diesel prices, some of its other, as damaging, effects are not perhaps given the attention they deserve. This is an error; long-term subsidies through their very existence cause excessive dieselisation, a problem in itself. One of the major problems with administered prices and subsidy regimes is that they, over time, warp the structure of the economy, eventually creating a constituency that comes to depend on non-economic prices — and an inevitable crisis. In India’s case, over 47 per cent of passenger vehicles sold in 2011-12 ran on diesel; the segment grew by about 35 per cent over the previous year, while the petrol segment actually shrank by 15 per cent. This is significantly different from comparable markets worldwide. Remember, too, that from being the “poor man’s fuel”, diesel in the private transport sector is used by cars and utility vehicles; two-wheelers, which dominate Indian roads, still run exclusively on petrol. However, the degree to which dieselisation warps commercial decisions is visible in the increasing number of small cars that use diesel engines, as well as attempts to develop two-wheelers that run on diesel. Indian auto research and development (R&D), which should be focused on improving safety, stability and worldwide marketability of its products, is instead spending all its energy on ways to take advantage of subsidies. Indeed, R&D is hit at the other end of the scale, too — both upstream and downstream oil majors are being stretched by the subsidy bill. The oil marketing companies borrowed as much as Rs 1.3 lakh crore in 2011-12. Oil India Limited and ONGC might exhaust their reserves in two years; their ability to fund research and exploration has been severely compromised.
Finally, there are the heavy environmental and public-health costs. Not only does cheap fuel disincentivise the environmentally necessary move to public transport, but diesel engines are estimated to emit between five and seven times as many tiny suspended particles (“particulates”, possibly cancer-causing) than do petrol cars. Moreover, the emissions are more noxious. Europe, which originally promoted diesel engines, has now discovered their problematic effects on air quality, and is trying to cut back on their use. When will India move to correct the long-term harm caused by the dieselisation of its economy?