Why diesel burns a bigger hole in pocket than petrol

Diesel, the most used retail fuel by almost all commercial sectors of the economy, is slowly crawling towards a record ~90 per litre in Mumbai. A gradual increase in retail fuel prices was expected because the price of oil itself is inching up — Brent crude now costs more than $65 a barrel — and product price is an indirect function of oil price.

Diesel, the most used retail fuel by almost all commercial sectors, is slowly crawling towards a record ~90 per litre in Mumbai.

A gradual increase in retail fuel prices was expected because the price of oil itself is inching up. But when the last time crude oil was this costly, a litre of diesel in Mumbai was available at ~70-72. Indians are paying ~15-20 more per litre of the fuel today than a year ago because of high taxation by the Centre, followed by states.

While end-consumers are more likely to use petrol rather than diesel, rising petrol prices hurt them more directly. But it is diesel that has a bigger influence on our lives, and this is what the consumer should probably be more worried about. Here is why.

First, the consumption of diesel in India is nearly 2.5 times that of petrol.

Diesel vs petrol

While personal vehicles use petrol the most, diesel is used by many farmers, and is the fuel used to transport each and every good. The cost of diesel gets directly passed on to the product being transported.

Diesel is used primarily for transport in India, according to a 2012 analysis. It is worrying that no such study has been commissioned by the Petroleum Planning and Analysis Cell, the information wing of the petroleum ministry.

Diesel use by sectors

The transport sector consumes 70 per cent of the diesel in India. In that, the biggest consumers are trucks, followed by private vehicles and commercial vehicles. Trucks alone consumed 28 per cent of the diesel in the country.

Now, everything you use — from the soap to the refrigerator to the latest package you ordered online — gets to your doorstep via truck. The transportation cost gets added to the final price. With input costs rising, inflation in the transport and communication segment has risen in the past few months. A recent Business Standard report showed how small truckers are bearing the brunt of high oil prices.

Transport and health inflation

Something similar had happened in 2018. Towards the end of that year, oil prices had crossed $80, and transport inflation had inched up and above general inflation then. The government had cut fuel excise duties to ease the retail prices.

A recent Nielsen report highlights high rural demand in the December quarter, raising questions on whether that is driving inflation. But here the comments by RBI Governor Shaktikanta Das in the most recent policy meeting are pertinent.

“CPI inflation excluding food and fuel remained elevated at 5.5 per cent in December, due to (the) inflationary impact of rising crude oil prices and high indirect tax rates on petrol and diesel, and pick-up in inflation of key goods and services, particularly in (the) transport and health categories. Proactive supply side measures, particularly in enabling a calibrated unwinding of high indirect taxes on petrol and diesel — in a coordinated manner by the Centre and the states — are critical to contain further build-up of cost-pressures in the economy,” he said.

High diesel prices, thus, have a tendency to show up in the prices of goods and services.

Another big component of the transport sectors is the buses run by state transport corporations. Most of them are loss-making because their average ticket fare is not hiked commensurate with the rising input costs, owing to political considerations.

Cities, on the other hand, have outsmarted their peers by progressing towards cleaner fuels, getting on board buses that run on CNG and electricity.

Input costs for farming

For a farmer, terms of trade favour him only if his income is rising faster than growth in input costs. By unilaterally raising input costs, dearer diesel dents farmers’ incomes.

Apart from these diesel-intensive sectors, high fuel prices also act as a deterrent to buying personal vehicles.

Carmakers are worried that sales of fuelguzzling SUVS might be affected. Telecom infrastructure companies are, however, cushioned through rising revenue per user for now, and the rising share of electricityrun towers under their business.