Evidence of how enlightened public policy can benefit consumers can be seen in the narrowing difference between diesel and petrol car models sold in recent weeks. Over the past few months, car manufacturers have cut prices of their diesel variants by between 10 and 20 per cent on the back of dwindling demand. Once the government did away with administered prices on motor fuel and allowed the state-controlled oil marketers to align retail prices to the market, a process that concluded in October last year, demand for diesel cars fell steadily - from 37 per cent of sales in 2013-14 to less than a third today. Interestingly, this trend does not trace a narrowing gap between petrol and diesel prices in linear terms; the price differential between the two fuels has ranged between Rs 10 and Rs 18 a litre. But it does reflect an understanding among diesel car buyers that sustained market-linked fuel pricing reduces the advantage of lower operational and maintenance costs associated with cars that ran on heavily subsidised diesel.
This, in fact, has been one of the abiding anomalies of the fact that diesel was more heavily subsidised than petrol. The subsidy existed because diesel was traditionally considered a "people's fuel" consumed by the freight and transport industry. Yet it was affluent Indians - the primary opponents of a fuel price cut - that benefited from it the most. An A C Nielsen study showed that diesel cars and gas-guzzling sports utility vehicles accounted for more than a fifth of total diesel consumption - by far the largest single sector. It is also ironic that car makers with large diesel plants became one of the strongest lobbies against free-market pricing on grounds that the market would become unviable - diesel cars cost more than petrol versions, owing to the addition of several components including exhaust treatment for cleaner air emissions, but owners enjoyed a lower cost of running them owing to lower fuel prices.
Deregulating motor fuel prices is a job half done, however. As long as kerosene continues to be sold at almost half its market price, the decontrol of diesel and petrol prices will achieve only one objective: of helping the government save some of its steadily unsustainable subsidy burden. It is well known that subsidised kerosene is diverted in large quantities to adulterate motor fuel, diesel in particular - a practice that has been responsible for a significant amount of toxic chemicals in the air. This, in fact, is what gave diesel a bad reputation in India as a fuel that was more polluting than petrol. At least, the government should make good on its decision to stop distributing the fuel through the leaky and inefficient public distribution system and switch to the direct benefits transfer scheme as soon as possible.
Finally, the government has been able to stay on the straight and narrow of fuel price reforms owing to a windfall of low global crude oil prices. This cannot last forever and an exercise in deregulation in the early 2000s foundered when crude oil prices rose. This government's ability to withstand populism will be tested when prices start rising again.
