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Dual pricing of diesel makes no sense

The price arbitrage for guzzling subsidised diesel would almost certainly lead to a host of directly-unproductive profit-seeking activitie.

ET Bureau|
Updated: Jan 29, 2013, 08.40 AM IST
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Reports confirm that the dual pricing of diesel has predictably meant huge perverse incentives for bulk consumers of the fuel to simply tap subsidised diesel in the retail market, where it is cheaper by a fifth. The price arbitrage for guzzling subsidised diesel would almost certainly lead to a host of directly-unproductive profit-seeking activities and opacity, meaning corruption and inefficiency.

The way ahead should be to do away with such dual pricing and have proactive policy in place for efficient prices that competitively reflect scarcity value of the fuel. Otherwise, the untoward result would be huge national costs with equally large fiscal implications. Already, it has reportedly been decided in Gujarat that bulk consumers like state transport buses would tank up at retail pumps.

The everyday leakages between the artificially-priced retail and bulk segments would, in effect, make nonsense of the policy of selective underpricing for retail consumers, to reduce the runaway subsidies on diesel. Worse, it would further distort the domestic pricing of diesel in the face of rising crude prices and disincentivise efficiency gains in marketing, logistics and supply of what are extremely high-volume oil products. India’s current account balance is imprudently in deficit due to reckless consumption subsidies on diesel. And, most of all, unfinished reform of diesel pricing would only jack up budgetary subventions, make Indian production lag the world in energy efficiency and misallocate resources right across the board.

The point is that repressing fuel prices sends all the wrong price signals: to fuel users, fiscal deficit watchers, competitiveness rankers and all seekers of intelligence in policymaking and design. Dual pricing of diesel makes no sense. We need to purposefully decontrol diesel, with a clear roadmap for the transition.

Predictability is more important than restricting the price change to homoeopathic doses. Further, the marketing of petrofuels has to be opened up, so that independent players can offer genuine competition that would rid the sector of cost padding. In the mature oil markets, up to half the offtake is from independent retailers like supermarkets.

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