The Government is hinting at a reduction of fuel prices following the drop in crude prices, after the recent huge peak. In the past, the prices of petrol have been high and diesel low, as many believe that raising the price of diesel would be inflationary and hurt vulnerable sections. But this is a rather exaggerated myth.

The cost of diesel and petrol is practically the same at the refineries. The low cost of diesel in relation to the high price of petrol in India is through a subsidy, and also leads to widespread adulteration of one with the other.

Highly subsidised kerosene is also a widespread malpractice that adds to India’s pollution and is damaging to vehicle engines. So, free and unregulated fuel prices will benefit everyone, except the many adulterators.

Road transportation is estimated to account for over 55% of the India’s diesel consumption, 26% by agricultural tractors and pump sets, and 6% is consumed by the railways. As most of the food grains – sugar, petroleum products, steel, coal and cement – are transported by rail, low cost diesel for the railways would ensure that the impact on inflation is further moderated.

As the transport element varies between 2 to 6% of the price of most goods, and the cost of fuel is just 35% of this cost of transport, the cost of diesel averages just 1.4% of the cost of most goods. India’s roughly 6 million trucks and buses have to also pay capital and finance costs on their vehicles, staff salaries, tyres, repairs, taxes, bribes, etc., that are unaffected by fuel prices.

Regarding the politically important farmer community, the cost of diesel is less than 2% of the cost of agricultural products. So, diesel prices only have a marginal impact on farm prices. And, as most of the tractors and pump sets are owned by the more affluent farmers, diesel prices will not affect poor farmers. It is also estimated that about 10% of India’s diesel in consumed by private and industrial gensets – the owners of which definitely do not deserve any subsidized fuel. Nor do the increasing numbers of people driving diesel fueled passenger cars.

Unlike most countries, India consumes 5.8 times more diesel than petrol and has to import considerable pre refined diesel. Conversely a Rs. 1 decrease in the price of diesel costs the Government as much revenue as a Rs. 5.80 decrease in the cost of petrol, so a narrowing of the price gap between petrol and diesel will keep the average fuel costs down and discourage a mindless shift from petrol to diesel cars. It may hurt the adulterators but not the farmers, and will not be very inflationary.