India - Dual pricing

India has experimented with dual pricing in many commodities, including cement, and still does in sugar. As a transition to a free market, it is perhaps unexceptionable. But in almost every case, it introduces distortions and rackets of different kinds — as exist now in sugar. And it usually lasts much longer than it should — again, sugar is a good example. So it is foolhardy on the part of the government to pick the one bad idea in the Chaturvedi report and seek to sanctify it as policy, especially when many far more sensible suggestions have been quickly buried — as this newspaper had forecast. Surely, those rooting for dual pricing can learn something from the market differentiation that was tried for kerosene — one price for that supplied through ration shops, and another for the open market. When there were leakages from the first to the second (as a school student would have forecast), the subsidized kerosene was given a special colouring but that seemed to make little difference. Even in the case of cooking gas, it is well known that many subsidized gas cylinders meant for the home market end up in the commercial market.
The obvious question is why the government thinks that dual pricing and segmented markets will work in the case of diesel. Bear in mind that a substantial part of the diesel sold in the country is already adulterated with kerosene, and that a great deal of the petrol too is adulterated (remember the ad campaign by an oil marketing company, guaranteeing pure fuel at select petrol pumps). In a market prone to such rackets, dual pricing is something that should never be tried. There are those who think that technology (smart cards) and effective management will work the trick. But to believe that both are available requires a leap of faith that is not required when a simpler option is available.
If the reason for pricing diesel lower than petrol is that public transport and the agricultural market (diesel gensets for irrigation) deserve a lower fuel cost, then private consumption of diesel can be discouraged by a higher duty on diesel car engines, which will raise the cost of a diesel vehicle in comparison with a petrol version. The Indian automobile market has been deliberately distorted over the years by the lower diesel price, so much so that car manufacturers who have had no diesel cars in their repertoire have been forced to introduce diesel engines in their models. This has resulted in an increasing proportion of cars sold being diesel versions, to the extent of about 30 per cent today, with the prospect of a further increase if no corrective action is taken. The additional duty on a diesel car can be worked out on the basis of the lifetime price benefit that is to be had from running a diesel as opposed to a petrol car. Unlike dual pricing for diesel, this method runs no risk of revenue leakages and distortions in the market.
The problem of course is that a sizeable vested interest has already been built up in favour of diesel cars, as more and more car manufacturers look at the diesel option. But that is no argument against doing the sensible thing. Indeed, if corrective action is not taken today, and the car market swings even more towards diesel, then a corrective becomes impossible tomorrow.