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May 25, 2012, 04.00 PM IST | Source: CNBC-TV18

How can diesel cost less than furnace oil?

Costing less than furnace oil, current diesel prices are an anomaly that needs urgent correction. The extent of the absurdity is highlighted by the fact that in recent times many factories have switched to the `cheaper' diesel as substitute for furnace oil, which used to be the cheapest among crude oil distillates some years back.

Kirit Parekh, Member, Planning Commission

Costing less than furnace oil, current diesel prices are an anomaly that needs urgent correction. The extent of the absurdity is highlighted by the fact that in recent times many factories have switched to the `cheaper' diesel as substitute for furnace oil, which used to be the cheapest among crude oil distillates some years back.

Kirit Parekh, member of Planning Commission, the architect who suggested market-determined pricing for petrol, told CNBC-TV18 that diesel to cost less than furnace oil sends out wrong signal. He backs it up by citing the preference of the common man in buying the cheaper diesel-run vehicle over petrol. The product needs to cost atleast Rs 4- Rs 5 per litre more.

The debate over current diesel prices started after the oil marketing companies raised petrol prices by a steep Rs 7.50 per litre without changing diesel, LPG or Kerosene prices. In absolute terms, diesel makes the largest impact on under-recoveries followed by LPG. This gap is bound to stoke inflation, says Parekh.

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Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Now we have a large petrol price hike and hopes of a diesel price hike again, what are your expectations?

A: I certainly expect that there should be a correction in diesel price because the difference in petrol and diesel price has become quite large and that is a distortion in itself. Also the fact that diesel price today is lower than the price of furnace oil and a lot of diesel is being diverted, some estimates say around 3 million tonne is burning as furnace oil. That should certainly be corrected.

I think Rs 4-5 price increase in diesel is the minimum one would expect. But I would also like to see at the same time that it is not just that Rs 4-5 price increase, but also deregulated prices so that henceforth, the prices adjust for themselves.

Now you can deregulate it by saying, okay I am going to fix my subsidy on the diesel account to Rs 6-8, whatever is required per liter and keep it at that level so that whatever changes take place, the prices are passed on to the consumers.

The government has a fixed and a well predictable amount of subsidy burden and the oil companies also know what they have to bear. I think that would be a lot cleaner and a simpler way of going about it.

Q: After the petrol experience you are still hopeful of the diesel being deregulated after what they did to petrol? Announcing a deregulation and then doing what they did?

A: Many years ago Pandit Jawaharlal Nehru said that in India if you lose hope nothing is left. One should never lose hope. But I do think that the government now has very little scope for not doing anything. One thing people have to realize is that, it isn’t as if that there is no inflation.

Inflation takes place, perhaps even larger inflation takes place 6-9 months down the line because you are increasing your fiscal deficit, you are increasing your under recoveries and that itself as a negative impact creates its own inflationary pressure. The trade off is between inflation, short term inflation, smaller short term inflation and a much larger long-term inflation.

I think the government needs to bite the bullet and decide that we will rather have a small short term inflation and we are done with it so that many other benefits can be derived from. You will have more efficient use of resources and particularly when we are importing such huge amount of it and it consumes so much of our foreign exchange, it is certainly in our interest to make diesel or petroleum product use as efficient as possible.

Q: What would be your realistic prescription with regard to LPG?

A: For LPG I think there is perhaps very little justification for subsidizing. Perhaps, 82% of the LPG users, I am sure, are capable of paying the full price of LPG. However, it is very difficult to go from here to there in one shot.

Maybe, the government will keep on increasing steps and so on. If and when the Aadhar scheme is fully realized then I would suggest that you fully liberalize LPG and give cash subsidy to some of the poorer people for buying LPG.

Q: Is the government even aware of the kind of distortion it is creating with the kind of pricing that is done with diesel versus the other fuel prices? In your interactions with them are they cognizant of the risks which arise with such a level of dieselization?

A: Yes I am sure government is aware of this. I think you can't blame the government for not being aware. Yes you may say that it knows what should be done but it is unable to do it.

Q: What is the specific kind of distortion that alarms you about what is going on with the difference in diesel prices?

A: You are using it for a cheaper fuel, generally considered cheaper fuel, an inferior fuel like furnace oil and you are burning more expensive fuel like diesel because we have artificially made it pricey. So that is distortion one.

Second distortion is a large number of people now are going for diesel driven vehicles rather than petrol driven vehicles. That means you are committing yourself to consuming diesel for many years to come. You are also distorting not only today’s consumption of diesel versus petrol but also for a long period of time.

Many people argue that diesel is more efficient. Yes it is true. But it is also a little more polluting and one has to keep the choice neutral between the two kinds of vehicles. If one is driving 20,000 kilometers a year, maybe a diesel vehicle is an economically preferred alternative. But if you are driving 10,000 kilometers, a petrol vehicle should be preferred.

Yes today with distorted prices, people are going for diesel vehicles no matter how much they drive or how little they drive and that is another distortion. You have distortion on use for passenger vehicle, you have distortion on use for substituting fuel oil and other products. I think you have distortion on air pollution also. The gap has to be narrowed in any case and some correction is absolutely inevitable in diesel price.

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