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Skewed policies to blame for diesel hike

The weighted average price of Indian crude imports was approximately US$ 22 a barrel in 2001-02. A decade later in 2011-12 this was well in excess of US$ 110 – a 400% increase!

Put differently, the US$ had significantly depreciated against crude oil – a fact that is lost on most debating the diesel price rise.

That is not all. The Rupee was approximately Rs 48 to a US$ in 2001-02. Over the decade it has depreciated by close to 12%. Put pithily, the Indian consumer faces a double whammy when it comes to the diesel price increase – a massive depreciation of the US$ against crude oil and on top of it, a depreciation of the Rupee against the Dollar. Hence, in Rupee terms crude has increased close to 500% in the past decade.


Nevertheless, the price of diesel to consumers in Chennai has increased from approximately Rs 20 in 2001-02 to a shade lower than Rs 50 now – an increase of a "whopping" 150%. Despite such massive hike in prices, the fact remains that it has mercifully not kept pace with the international prices of crude expressed in Rupee terms. Consequently, diesel has been substantially subsidised in domestic markets.

The net effect – the subsidy only on account of diesel works out to Rs 29,000 crores for the first quarter ending June 2012 (well in excess of Rs 100,000 crores for the entire year). Surely, one will agree that this is becoming an unworkable proposition. It may not be out of place to mention that we allowed subsidised diesel to fuel our SUVs for our rich, when in fact we should have used this money for funding education, health and infrastructure.

One way out was possibly to cut the excise duty (ED). But there is a catch – the ED on diesel works out to a mere Rs 2.06 per litre leaving very little headroom to manoeuvre. Let us also not forget that the petroleum sector is the largest revenue earner for the central government. Hence, any cut in ED could possibly be counter-productive.

The increase in international price of crude is the outcome of the weakness of US$. One way out of the imbroglio is to facilitate Rupee appreciation against US$ to counter the US$ depreciation against crude oil. Inexplicably, Indian policy framers have been wedded to a weak Rupee without exploring any alternatives. And that is the crux of the issue.

But a weak Rupee has its upsides. It encourages exports and some of us are beneficiaries of this policy. Secondly, it favours foreign investments into India. Marginal depreciation of the Rupee over the decade was a huge deterrent for foreign investors to exit India.

Having entered when the Rupee was 45 to a US$, who would like to exit when the Rupee is 55? That implies a neat loss of Rs 10 for every dollar invested in India, irrespective of the profit or loss made by such investment. That is how, by a planned devaluation of the Rupee, RBI has protected the Indian stock markets.

A government that often measures its performance through stock market indices is bound to genuflect in front of foreign investors. Higher diesel price is an outcome of such skewed economic policies where the government exists by the Sensex, for the Sensex and of the Sensex. In the process, if the common man has to pay a higher price for diesel to protect stock markets, the thinking in the government seems to be "so be it."


Last modified on Sunday, 07 July 2013 07:36