India - Dual fuel pricing and effects

The road transport undertakings of various states will have to fork out over Rs 5,000 crore if the recommendations of the BK Chaturvedi Committee on dual pricing of diesel are accepted by the central government.

This could put these loss-making undertakings under severe financial strain. The state road transport undertakings made total losses of over Rs 2,150 crore in 2006-07.
The Chaturvedi Committee and the public sector oil marketing companies have suggested that all industrial and commercial establishments including the state transport undertaking and the railways, which are the largest consumer of diesel in the country, should pay for the fuel at the market rate.
The public sector oil marketing companies sell diesel and petrol at highly subsidised prices in order to shield customers from the rise in crude oil prices.
If the suggestions are accepted, the state road transport undertakings will have to pay Rs 56 a litre for diesel. This is 64 per cent higher than the Rs 36 a litre that they currently pay.
Senior officials in various state road transport undertakings said this could hit them hard because they are not allowed to raise fares in tandem with rising fuel costs. “Fuel prices have increased 400 per cent in a decade, from less than Rs 9 per litre in 1996 to over Rs 36 per litre currently,” said one official.
Continuous losses of urban transport undertakings have led to inadequate funds for augmentation or replacement of fleet and poor maintenance, which in turn has caused poor operational performance. “Pricing diesel at the market rate would result in these undertakings sinking further,” said another state government official.
Diesel constitutes around 33 per cent or Rs 8,345 crore of the total operational cost of Rs 24,950 crore for the state road transport undertakings. The dual fuel pricing formula, if implemented, will take their annual fuel bill to Rs 13,608 crore. The annual diesel consumption of the STUs currently stands at 2.43 million kilolitres.
N Ramaswamy, faculty member (research & consulting), Central Institute of Road Transport, said, “Charging diesel at market price will definitely put an additional burden. In that case, I would recommend that as in London, the government should at least give a diesel subsidy to the state road transport undertakings for the additional price they will pay the oil marketing companies.”
The Indian Railways too will have to shell out additional Rs 4,939 crore, 60 per cent more than the current bill, if diesel is priced at the market rate. This will take their annual fuel bill to Rs 12,939 crore. Currently, the railways consume 2,270 million litres of diesel annually at a total cost of Rs 8,000 crore.
However, railway officials declined to comment on the recommendations submitted by the Chaturvedi Committee.
An official at Rail Bhawan said, “Since we have not received any official communication from the government on the dual fuel pricing formula, we would not like to comment at this point of time.”