Hiking auto excise duties ducks the real issue
Given that Monday’s 70 paise hike in each litre of petrol (on top of a R7.5 one on May 23) is a response to hardening global petroleum prices and a falling rupee, you’d think the government would be in a tearing hurry to hike diesel prices on which the under-recovery is currently R80,000 crore a year. While the oil ministry has now said it will take up the need to hike diesel prices with the CCEA, we were told a diesel hike would take place after the UP elections; when that milestone passed, the new one was the Presidential election; that too has passed and, with crude prices back at $104 after having corrected to $94 and the rupee at 56 after recovering to 55, it looks as if the UPA may once again have lost the moment. Obviously a hike will take place, but with each passing day, the required hike gets higher—under-recoveries on diesel have risen from just R9,279 crore in FY10 (oh to have deregulated then!) to R34,706 crore in FY11, R81,192 crore in FY12 and R79,373 crore in FY13 going by today’s crude oil and rupee values.
With the required diesel price hike rising again, there’s talk once again of hiking excise duties on diesel cars in order to keep the diesel price hike to a minimum. Given that diesel cars consume just 15% of diesel sales, this is an exercise in futility—in any case, even an 8% hike in excise duties on diesel cars won’t fetch more than R6,500 crore. Nor will it do much to curb consumption since today’s R27 difference in petrol and diesel prices is in itself a huge saving—someone driving for 6-8 months can easily make up the increased costs by way of an excise duty hike on diesel cars. Which is why, while diesel consumption grew by 5.1% a year between 2002 and 2009, it is estimated to grow by 5.9% in FY13; after growing at 7% in 2002-09, petrol is expected to grow at a lower 5.8%; and with diesel so cheap and substituting for burning in furnaces, furnace oil sales are likely to contract 6.2% this year.
And given that per capita incomes have doubled in the last 5 years while diesel prices have gone up by around a third, there’s considerable scope for a price hike while leaving the common man no worse off than 5 years ago. With this out of the way, the government’s last excuse is that hiking diesel prices will trigger an inflationary bout—well, in 2010, the Kirit Parikh deregulation report had rightly pointed out the inflationary impact of a diesel hike would probably equal the deflationary impact of a fall in subsidies. In the more immediate future, RBI has made it clear it’s not going to cut rates till the government consolidates the fisc. The message is clear: no price hikes, no rate cuts.