Dramatic drop in petrol and diesel prices: Who are the real beneficiaries?
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Dramatic drop in petrol and diesel prices: Who are the real beneficiaries?

November 9, 2021

By Bhamy V. Shenoy

More likely I may be the only one who questions the policy of NDA Government to drop petrol and diesel prices as a Deepavali gift. I am sure to get brickbats from most. I should hasten to add when in 2018 P. Chidambaram  of UPA asked Prime Minister Modi to reduce petrol price by Rs. 25 per litre, I was critical of him. I wrote only if Modi becomes a magician he can do so and Chidambaram should not mislead the country (SOM dated May 25, 2018).

If we follow the exhortation of Mahatma Gandhi, “Recall the face of the poorest and weakest man you have seen and ask yourself if this step you contemplate is going to be any use to him,” one will appreciate why I am opposing the policy of price reduction by NDA.

Based on my analysis of the pros and cons of this populist policy of NDA, I conclude that lowering of prices hurt the poor of India far more than giving some needed help to a small section of farmers or those who depend on private vehicles for their livelihood. The rich and the middle class, who are the owners of private vehicles, are the real beneficiaries and these are the ones who do not need such help.

As a result of lower prices, Central Government will lose at least rupees one lakh crores (one trillion) of revenues which could have been used to improve Government Schools, improve health facilities which poor are failing to get, help millions of children with stunted growth with nutritious mid-day meals, etc. It needs repeating that despite having all the resources, India ranks poorly in sectors like education, health and hunger where our poor need help desperately. All                                                                   political parties promise to provide such assistance and do just the opposite.

According to 2015-16 National Family and Health Services report,  just 6% of households own cars and 38% own two-wheelers. Four-wheelers account for 36% of petrol consumption while two-wheelers for 62% and three- wheelers for 2%. This clearly shows that only the middle class and the rich will benefit from the reduced petrol prices.

According to a report by Nielsen for Petroleum Planning and Analysis Cell, transport sector represents 70% of diesel consumption. Remaining 30% is from the non-transport sectors — use in agriculture mostly for tractors and pumpsets (13.0%), industry(9%), power generation and others (6.5%) and mobile towers (1.5%), etc. Owner of a tractor or industrial company is hardly a common man.  In the case of transport sector, buses (used mostly by the common man for travel) use just 6.8% and the rest is used by private vehicles and for transporting goods.

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Detailed analysis of diesel consumption clearly shows that common man is affected only marginally and that too by the multiplier effect of higher transportation costs for goods. If we can trust wholesale price index, then the weightage for petrol and diesel in WPI is 1.6% and 3.1%. In short, fuel consumption analysis shows that only a small percentage of fuel price decrease will help the common man.

Let us compare the revenue loss from lowering of prices of Rs. 1.00 trillion to the personal income tax of Rs. 5.61 trillion (18%) as per 2021-22 budget. This significant largesse along with similar or more (only Kerala has decided not to reduce taxes since it cannot afford) reduction by States is indeed a Deepavali gift to the rich and middle class.

Since the estimated fiscal deficit of 6.8% exceeds the desired level of 4.5%, reduction in petrol and diesel prices will force the Government to reduce its expenditure of welfare projects like Ujjwala, health insurance, building toilets, MGNREGA, education, etc., which will really help the common man.

It is a truism that high fiscal deficit will result in higher inflation in most cases. Inflation                                                has always been known to hurt the common man more than the middle class and the rich. Most of this reduction will go into the pockets of the rich and middle class who use cars, two-wheelers, tractors, power generators, etc.

It is ironical that when world leaders are discussing strategies to fight climate change, India has reduced taxes on fossil fuels instead of increasing to promote faster transition to electric vehicles. Modi could have replaced part of excise taxes by equal or more and called it “carbon tax” on petrol products. Had he done that the world would have applauded him for his path-breaking initiative.

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For comparison purpose, there are more than 60 countries where petrol prices are higher than that in India which is about Rs. 105 per litre. In fifteen countries, petrol prices are higher than Rs. 150 and in the US which wants to lead the fight against climate change, petrol price is only Rs. 75, really ironical.

Finally, we need to realise that there is no free lunch though politicians keep promising it — it is either low fuel taxes to help the rich or welfare projects to help the common man, less inflation and faster energy transition. Choice is obvious.

Note: Dr. Bhamy V. Shenoy, an IITM graduate, has over 50 years of experience in international oil industry having worked for Conoco in US and Europe. He was on the board of Georgian National Oil Company, Advisor to former Soviet Union countries of Kazakhstan, Uzbekistan, Turkmenistan and Georgia and also advised Ghanian Government, Pemex in Mexico, Pertamina in Indonesia, etc. He was Senior Advisor to Centre for Energy Economics at University of Texas. In India, he served as a member of Advisory Committee to Chairman of ONGC.—Ed


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