Government's self-goal: DNA 23rd July 2010

One of the major achievements of the UPA government in the recent past has been to actually increase the prices of petroleum products. This bold move has been defended as being fiscally sound as it brings life back into the oil marketing companies, where under-recoveries have been very high. The ministry has been saying that it would make the price of both petrol and diesel fully market determined, and while the price of petrol was increased by Rs3.50 a litre, diesel was hiked by Rs2 a litre. Going forward, the government is quite enthused about aligning diesel prices completely with the market.
The situation is really quite funny because this particular move has some unintended consequences for the government. Let us look at petroleum first. Today it is estimated that there are around 12 million cars that run on petrol in the country. Out of this number, around a third are used by the government — both owned and hired. The government here stands for the larger concept of public sector, including Central and state governments, local bodies, public sector banks, and public sector enterprises at both the state and Central levels.
All expenses of these entities finally fall under the purview of the concept of government. And all users of these cars are reimbursed petrol expenses to various extents, depending on the rank and seniority of the official concerned. While these vehicles are meant for official use, there could be considerable extensions to the personal domain.
Now assuming that on an average a car uses 200 litres of petrol a month on a conservative basis, the additional amount spent on each of the 3.6 million cars used by the public sector would be Rs700 a month (at Rs3.50 a litre), or Rs8,400 a year.
Cumulatively, the annual cost works out to around Rs3,000 crore, which is just about the same amount provided as subsidy on petroleum in the Union budget for 2010-11. The amount will, of course, come in quite unobtrusively as various departments within the government sector will first fork out the money as petrol expenses. This will negatively affect the government’s finances ultimately through lower profit ploughbacks. Seen separately, this number will not even be noticed by the companies or government
departments concerned.
Let us look at diesel now. Around 15% of diesel consumption is in the farm sector which the government is trying to protect all the while.
The increase in diesel prices feeds into irrigation costs and pushes up the cost of production for all farmers. This cost will finally be covered by the government when it announces the new minimum support prices (MSPs) for crops, which actually will be paid again by the government. This is one part of the story. But the government transports the same and pays for it under the popular public distribution scheme across the country.
Now, the government procures 50 million tonnes of rice and wheat every year. On an average, the cost of procurement and distribution is between Rs400-500 a quintal, of which transport costs would be about half. Therefore, the present increase of price in diesel of around 5% (which will double once the hike is of the order of Rs4 a litre) will actually mean that the per kg cost of procurement will increase by around 10paise.
Given that the government is dealing with 50,000 million kg, the cost would increase by another Rs500 crore. Now, depending on the extent to which the government chooses to compensate the farmers for the higher cost of production on account of transport costs through the MSP, the overall cost to the government itself could be another Rs500 crore.
So now, we are talking about anything above Rs4,000 crore being the cost to the exchequer on account of this increase in prices of fuel products.
This brings to mind a famous quote of the fictional character of Sir Humphrey Appleby in the now legendary Yes, Minister TV series: Asking a town hall to slim down its staff is like asking an alcoholic to blow up a distillery.
The lesson is really that, at times, going overboard to correct one anomaly leads to another one. Drawing from contemporary cases that have been under review, if the same yardstick of ‘responsibility’ in the Bhopal gas tragedy were applied to other major catastrophes in the areas of public airlines (remember Mangalore?) and railways (the series of mishaps that take place every year), then the government would once again be caught in an ocean of embarrassment in terms of compensation!