Diesel price hike has been good

Dr Bharat Jhunjhunwala
The Government had started increasing the price of diesel about six months ago. At that time almost the entire opposition had stood up in opposing the hike. Argument was that this would lead to an all-round increase in price and adversely affect the poor. Both arguments have failed. Inflation is under control and there is no indication of increased unrest among the poor due to price rise.
Inflation has been on the downtrend despite increase in price of diesel because the beneficial impact on fiscal deficit. The Public Sector oil companies were buying diesel at about Rs 65 per litre and selling it in the domestic market at about Rs 45 per litre. The Government was paying a subsidy of about Rs 20 per litre. Increase in price of diesel has led to less subsidy and reduced outflow from government revenues on this count. Correspondingly the Government has had to print fewer notes to provide this subsidy. Printing of fewer notes has led to lowering of inflation. Remember, when the government prints notes, these new notes start chasing the available goods in the market. This leads to an increase in price just as entry of a big buyer in the street corner vegetable market immediately leads to an increase in prices. Conversely, printing of fewer notes by the Government has led to some reduction in inflation. The increase in inflation due to increase in price of diesel has been nullified by reduction in inflation due to less pressure on the Government to print notes.
The fear of negative impact on the poor has is also not seen. The consumption of diesel in the country is distributed as follows: Trucks 37 percent, cars 15 percent, agriculture 12 percent, buses 12 percent, industries 10 percent, electricity 8 percent and railways 6 percent. Of these, the ultimate consumer of diesel used in trucks, cars, industries and electricity is mostly the upper classes. Goods transported by trucks and goods produced by industries are mostly consumed by these classes. The poor are mainly impacted by the diesel used in buses and railways.
The ultimate consumer of diesel used in agriculture too is often the upper classes. A large amount of diesel is consumed in the production of grapes in Gulbarga, chilies in Jodhpur, and menthe in Bareilly. Diesel is scarcely used in the production of poor-man’s crops like ragi and bajra. The farmer only performs the duty of the driver who reaches the diesel subsidy from the government to the upper classes.
On above considerations I reckon the consumption of diesel by the poor would be about 20 percent of the total. Total diesel subsidy was about Rs 100k crores. Of this the share of poor would be about Rs 20k crores. Considering that 100 crores out of our population of 120 crores are poor, the subsidy obtained by the poor would be about Rs 200 per person. On the other hand, share of the upper classes in the diesel subsidy would be 80 percent or Rs 80k crores. Considering that 20 crores of our people are ‘upper class’, the subsidy obtained by the upper classes would be about Rs 4,000 per person. In other words, the poor are being used as a shield by the upper classes to grab bulk of the diesel subsidies.
That said the burden of Rs 200 per person on the poor is still unwarranted. The poor man is directly hit by increase in rail and bus fares. The solution is to reduce the burden of tax on the poor through other items that are not consumed by the rich. It would be best to classify the goods sold in the market in three categories-mostly consumed by the rich, consumed both by rich and poor, and mostly consumed by the poor. The tax rates should be high, medium and low respectively. Items like Hawaii Chappals, coarse cloth, unbranded soap and low quality paper are mostly consumed by the poor. These may be wholly exempted from excise and sales tax. Similar categorization can be done among the services liable to service tax. Such tax rates will wholly neutralize the impact of diesel price hike on the poor. It is clear that the fear of the opposition has proven a non-starter. Inflation is under control and only a small impact has taken place on the poor.
There have been other beneficial impacts of increase in the price of diesel. Cheap diesel was harmful for health of our people. Sunita Narayan of Centre of Science and Environment says that emissions of particulate matter and nitrates are seven times more in diesel than in petrol cars. These lead to asthma, bronchitis and heart diseases. They can also lead to cancer over long periods of time. Cheap diesel puts our economic sovereignty at stake. Cheap diesel leads to increased consumption, forcing the country to import larger quantities. We are becoming dependent on imports. Our energy security is at stake. Cheap diesel also hits are the development of alternative sources of energy. I had occasion to study the working of Gobar gas plants at Village Shyampur near Haridwar about a decade ago. The village had a large number of Gobar gas plants that were working. Then cheap LPG cylinders became available. Soon farmers began to abhor the work of mixing dung, and removing and drying slurry. They abandoned Gobar gas. The same applies to solar and wind energy. Development of solar energy is under stress because price of electricity is low, in part, due to availability of subsidized diesel. The positive impacts on environment, sovereignty and alternative energy sources are a bonus that increase in price of diesel has provided us with.
The fear of the opposition that increase in price of diesel will lead to a huge increase in inflation has been proven wrong. Inflation is under control. The fear of adverse impact on poor is also not seen. Some negative impact on the poor may indeed have taken place but this is small. In any case, the other beneficial impacts appear to have compensated for this negative impact. The Government must reduce taxes on items consumed by the poor to reduce the burden of increase in the price of diesel upon them. The positive impacts of price hike on environment, national sovereignty and development of alternative sources of energy are a bonus. Thus we should not only welcome the ongoing increase in the price of diesel but seek higher taxes on this commodity to reduce consumption and secure our economic sovereignty.

Follow our WhatsApp channel