A rise in price of petrol by itself will have a negative impact on the economy and the environment unless it is followed by an immediate hike in diesel prices as well, writes Anjor Bhaskar

It is a moment for all those who have been fighting for equity and justice in India's fuel policy. The rise in petrol prices is but a courageous step in the face of a declining rupee and rising crude prices globally.

The price hike could have been delayed, but then who would have paid for the huge subsidy? The only wise and just course was to allow oil-marketing companies to follow market forces and increase petrol prices.

And, by criticising the government for the hike, for whom is the opposition really fighting? It claims to be championing the interests of the masses. But those who are affected by the hike are the well off who own vehicles.

The real masses are the majority of Indians who do not own their own vehicles, but use public transport, walk or cycle to their destinations each day. It is this majority that suffers from the pollution and congestion caused by the rising number of private vehicles. Justice, fairness and equity demanded that the vehicle owners pay up for the comfort of their travel out of their own pockets and not out of the public exchequer.

In their knee-jerk reaction, opposition parties and the media have ended up putting out the fallacy that the fuel-price hike will lead to inflation and will hurt 'aam admi'. Well, the truth is that a rise in petrol prices will have a close to zero impact on inflation since petrol is used only for personal travel and not for transport of goods. Its weightage in the consumer and wholesale price indices is marginal.

Further, 'aam admi' travels by buses, shared auto rickshaws, cycle rickshaws, trains, bicycles and on foot and therefore do not depend on petrol much. However, 'aam admi' will certainly be hurt if the money he pays as direct and indirect taxes is used to subsidise petrol that is consumed by the better off.

However, it is true that a rise in petrol prices alone will continue to worsen the problems caused by the difference in prices between petrol and diesel. A rise in the price of petrol alone will have a negative impact on the economy and the environment unless it is followed by an immediate hike in diesel prices as well.

Already, around half of the cars being produced have diesel engines, while in the small car segment, nearly 70 per cent of the cars run on diesel, according to the Centre for Science and Environment (CSE).

According to the CSE, ''The central government is estimated to have lost close to Rs800 crore in fuel excise, just from the diesel used by the new diesel cars sold in 2010-11. From the on-road fleet the loss is staggering - close to Rs3,000 crore.''

It is estimated that the loss in excise on diesel alone will be Rs90,900 crore in 2012-13, if taxes are not raised.

If the price difference between petrol and diesel continues, buyers will simply shift from petrol to diesel cars. As it is, the taxpayers pay a heavy price to provide subsidised diesel to rich carowners. With the rise in price of crude and the falling rupee, more public money will be lost and more potential revenue foregone just to ensure cheap diesel to the few rich car owners.

Out of the total diesel consumption in the country, nearly 15 per cent is consumed by cars. This implies that nearly Rs15,000 crore of diesel subsidy went to diesel car owners in 2011-12, while the middle classes using two-wheelers (that do not consume diesel) gained nothing.

Should the taxpayer be made to subsidise the personal travel of those who can afford to pay for it?

Rural development minister Jairam Ramesh recently stated that the fuel subsidy bill was much higher than the total expenditure on rural development in the country. The entire budget for rural development (including drinking water, sanitation and social welfare) for 2012-13 stands at Rs99,000 crore -  nearly half of what the government will spend on fuel subsidy during the year, and equal to the subsidy on diesel.

And diesel consumption by cars adds to a cost that is not quantifiable in monetary terms - congestion and pollution that take a toll on human health. Why then should the public pay to subsidise the fuel? Perhaps, the government could either consider banning the production of diesel cars or raise taxes on diesel to bridge the gap with petrol.

But that would be a politically unsound move, many would say, since it would lead to inflation. But inflation is already high - one way or the other. Currently, inflation is high because of the high fiscal deficit, a large part of which is due to crude oil imports. This is also one of the prime reasons for the decline in the value of the rupee, which again causes inflation.

This is a bottomless pit. The government continues to subsidise fuel, because of which our fuel dependence (and import dependence) continues to grow and our import bill and the consequent fiscal deficit expands further and fuels inflation.

The oil companies, which suffer losses when fuel prices are not allowed to rise are then compensated by the government through subsidies or oil bonds. In either case, it is the common taxpayer who pays through reduced budgetary allocation for social and infrastructure spending, higher taxes and higher inflation.

On the other hand, deregulation of fuel prices would at least push the market towards correction and help reduce consumption of imported fuels.

Instead of crying over the rise in fuel prices, the opposition and the media must put pressure on the government to improve public transport across the country so that we become less fuel dependant. This is in the long-term interest of the 'masses' of the country.