It is common knowledge that populist policies making the price of petrol expensive and diesel cheap created great distortions and rampant adulteration. The issues need to be understood especially as the country will soon need to revise fuel prices to fill the huge and growing oil pool deficit. A new Government will have consider the merits of narrowing the huge price gap that leads to such disparities.

In most countries the price of diesel is the same as that of petrol or just marginally lower unlike in India where it is 70% lower. Consequently the consumption of diesel is 7 times higher than petrol so a Rs. 1 increase in the price of diesel will generate as much revenue as a Rs. 7 increase in the price of petrol.

The price of petrol has been put up frequently over the years because cars and bikes were considered to be luxuries while the price of diesel was kept low because it was believed to benefit poor farmers and help contain inflation. The validity of these opinions need to be examined.

A careful analysis will show that these are myths unsupported by facts. Cars and bikes are now becoming essentials for business and life in general and are huge engines of economic and employment growth.

No poor farmer will be hurt by a diesel price increase because few poor farmers own tractors or diesel pumpsets. The rich owners of large and small diesel gensets may complain but a Rs. 2 per quintal increase in their procurement prices will probably cover their diesel costs plus give a bonus to the really poor farmers. Only some 26% of diesel goes to farmers

A diesel price increase will not also be very inflationary as many politicians fear. Most bulk goods, food-grains, cement, steel, etc., go by rail. So the railways who consume 6 % of India's diesel can continue to have subsidised fuel. Road transport is supposed to account for about 65% of diesel consumption but roughly 20% of this goes to captive gensets. According to a study by powerline research, captive power is now estimated at 20,000 MW or 22% of India's power production. Cheap diesel makes captive power cheaper than power from the SEB's and these buyers who can afford to pay a bit more need no Government subsidy.

The impact on transportation costs is also exaggerated. If the cost of transport averages 5% of the cost of goods and if the cost of diesel accounts for 40% of this cost, it will be just 2% of the cost of goods. Therefore, a Rs. 3 or 25% increase in the cost of diesel may contribute just 0.5% to the average cost of goods. The impact may be more on short haul products like vegetables, fruit, milk and perishables but still not as huge as many will try to make out.

There is also the issue of diesel engined cars. These consume little of India's diesel because cars have small engines that usually do limited mileage unlike trucks that have big engines and do heavy mileage. A diesel car may consume about 70 litres for an average of about 1000 kms a month as compared to around 1250 litres by a truck doing 5000 kms a month. A truck's diesel consumption may thus be about 18 times higher.

Then there is the burning issue of pollution. Most of the new petrol and diesel vehicles are not polluting. Most of India's diesel consumption and pollution is generated by the old trucks and busses and the very dubious diesel engines that have been haphazardly retro-fitted to most of India's taxis and Government vehicles. Actually Government cars and vans are among the worst offenders in this practice that is illegal.

The price difference with petrol clearly needs to be narrowed. With a price reduction of Rs. 3 in petrol prices and a Rs. 3 increase in diesel prices, petrol will cost about Rs. 21 and diesel about Rs. 15. So a Rs. 3 reduction in the cost of petrol will cost the Government as much as 43 paise in the cost of diesel leaving it with a huge income from the net difference. It is high time to measure the facts objectively and end the farce of justifying cheap diesel.