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Mainstream, VOL LI, No 9, February 16, 2013

Benefits of Diesel Subsidy: A Story from Mumbai

Monday 18 February 2013, by S G Vombatkere

The government has announced that bulk diesel consumers like Railways and State Transport Corporations have to purchase diesel at market-determined rates, while diesel purchased at fuel outlets will continue to receive subsidy. Assuming diesel subsidy as Rs 10 per litre, let us examine the effects of the recent government order.

Mr Suresh Kumar (not his real name), living in Bandra, Mumbai, maintains three cars, but we will keep the discussion to the SUV that only he uses. Mr Kumar’s SUV gives him 8 km per litre, and on average he drives about 2000 km every month. He thus purchases 250 litres of subsidised diesel, and utilises subsidy of Rs 2500 (250 litres x Rs 10 per litre) every month, or Rs 30,000 annually, for his SUV. This subsidy is borne by taxpayers, which include all citizens including the poor, for whom cost of essentials includes indirect taxes. But for Mr Kumar, the more he drives around, the more diesel he uses, and the more subsidy he utilises.

On the other hand, domestic worker Sonabai living in a Mumbai chawl, has to travel by BEST bus, spending Rs 30 on bus fare every day to and from work. But BEST, which is a bulk consumer of diesel, has to purchase diesel at market rate, and hikes the bus fare so that Sonabai spends Rs 40 every day instead of Rs 30. That is, Sonabai spends Rs 10 more every day (Rs 3650 more annually), while Mr Kumar avails of Rs 30,000 subsidy annually.

Let us consider the cost to the environment. Noting that whosoever is responsible for consuming diesel, every litre consumed produces exhaust gases that pollute the environment. Whether Mr Kumar’s SUV carries one passenger or more, it consumes essentially the same quantity of diesel and creates the same quantity of exhaust gases. Mr Kumar’s SUV has a seating capacity of eight passengers, but usually it has only Mr Kumar himself. Thus, his SUV is used at one-eighth of its carrying capacity, but the diesel consumed, and the consequent pollution caused, is no less. As a single individual, he consumes the diesel that eight could have used. As assumed earlier, his SUV gives 8 km/litre or, put another way, uses 125 ml/km. Thus, if the SUV had eight passengers, each passenger would be effectively using 125/8=15.6 ml/km. But since Mr Kumar’s SUV provides transportation only for himself, the per capita diesel consumption of his SUV is 125 ml per km, and produces per capita pollution from burning 125 ml/km.

On the other hand, consider Sonabai’s bus. It has a seating capacity of 52 and a standing passenger capacity of 24, but when she travels it is “rush-hour” both ways, and the bus is packed with about 100 passengers. While it costs essentially the same to operate the bus whether it is empty or full, it is obviously most economical when the bus is full or over-full—occupancy is a major determinant of the economics of a vehicle. However, economics does not trouble Mr Kumar when he travels alone in his SUV and fills its tank with subsidised diesel using his credit card.

The bus consumes about 0.5-litre of diesel per km @ 2-km per litre. Thus, for every kilometre travelled during rush-hours when the bus carries 100 passengers, each passenger effectively uses 500/100=5 ml of diesel, and is responsible for pollution due to burning 5 ml of diesel. That is, the per capita diesel consumption in a bus is 5 ml per km, producing per capita pollution from burning 5 ml per km.

Thus, Mr Kumar ordinarily consumes 125/5=25 times as much diesel as Sonabai, and is responsible for about 25 times as much exhaust gas pollution as her. And, while she effectively multiple times more eco-friendly than Mr Kumar.

Finally, consider the traffic congestion on the roads. Mr Kumar’s SUV, like any vehicle, occupies road space when it moves or when it is parked on the roadside. It is true that a SUV is about half the size of a BEST bus, and a bus too occupies road space though only when it is on the move, because it is never parked on the roadside. Nevertheless, the per capita usage of road space has arguments similar to those for diesel consumption, and Mr Kumar uses much more road space, which is a public good, than Mrs Sonabai who represents the vast majority of urban poor. Thus Sonabai is far less demanding of civic amenities than Mr Kumar.

Thus, on a per capita basis, Mr Kumar uses more road space, consumes more diesel, and causes more pollution than Sonabai, and even gets his subsidised diesel at her cost. Further, there are many lakhs of people like Sonabai and only many hundreds of people like Mr Kumar, and it does not require rocket science to understand who subsidises whom, and who is more responsible for diesel consumption, vehicle exhaust pollution and road congestion. Further, at the hiked bus fare, Mrs Sonabai spends Rs 40 per day or Rs 1200 per month on transport, 20 per cent of her Rs 6000 per month wages. But Mr Kumar spends Rs 13,000 per month (250 litres@Rs 52/litre) on diesel for his SUV and it is less than one per cent of his declared monthly income of several lakhs.

This discussion indicates who is most responsible for some of the ills of urban living, and hopefully will serve to urge the government to adhere to its own National Transport Policy, which incentivises affordable public transport (not Volvo AC buses that Sonabai cannot afford) and disincentivises use of private motor vehicles. Contrary to Veerappa Moily’s assertion, charging market rates for bulk diesel consumers forces those who are already poor, to pay more for their living. Thus, the policy of the present and previous Union governments is arguably pro-wealthy and effectively anti-poor.

Major General S.G. Vombatkere retired as the Additional Director General, Discipline & Vigilance in Army HQ, New Delhi. The President of India awarded him the Visishta Seva Medal in 1993 for distinguished service rendered over five years in Ladakh. He writes on strategic and development-related issues. He can be contacted at sg9kere@live.com

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