Best solution to namma trafficu!

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Written By mcadambi - 3 February, 2010

Bangalore Analysis Transportation Private transport car

 Recently the Govt of India has constituted the Kirit Parikh Committee to deregulate prices of petroleum products (diesel, petrol, kerosene, LPG).

Due to the populism of our mai-baap sarkar, it is broke! And it can no longer afford to subsidise "common man's fuel". Actually, 70% of the indians use firewood and cow dung. The subsidies largely go to the urban middle classes, who hardly form about 25% of the population.

Simple economics says that price signals are essential for allocation of scarce resources. And higher the prices on petrol and diesel, there will be more force to step up effeciency of their use (in terms of research and development in increased mileage of automobiles) and encouraging use of renewable sources (solar pv could replace diesel gen sets for example).

Also, for our namma bengaluru, increased prices of petrol and diesel will make owning a two wheeler or four wheeler costly (actually cars will feel the pinch more). 

Deregulation of petroleum prices is also essential, because if deregulated, the BBMP can charge a cess on all petrol and diesel sold in Bengaluru to fund our road infrastructure.

The Full Report can be accessed here: http://petroleum.nic.in/reportprice.pdf

COMMENTS


Agree on deregulation

s_yajaman - 4 February, 2010 - 03:05

 MC,

Agree wholeheartedly.  LPG is primarily used by urban middle class consumers and not by the common man.  Why such a person should get subsidised LPG remains a mystery. This folly has continued long enough and will continue as well.  They should have done this last year when crude had collapsed to some $40/barrel. 

If you remember a long time ago the government used to try and put a fixed price on the USD and ration it, etc.  There used to be a thriving black-market where the real price used to be reflected.  Then we finally ran into a BOP problem and then things changed.  So maybe a proper crisis is needed for change to happen.

Amazing considering we have highly qualified economists in the cabinet and one as PM.  

Srivathsa

 

 

 

 

 

 

Removal of Fuel Subsidies

Naveen - 4 February, 2010 - 05:03

Making fuel expensive for private vehicles is a very basic step to restrain use, with hikes in costs for petrol with removal of subsidies. Increase in LPG costs for domestic /commercial use may also be accepted without too much discontent.

However, removal of subsidies for diesel & kerosene might not be all that easy since prices for basic commodities will shoot up. The answer is perhaps to retain subsidy for distribution of basic commodities such as rice, sugar, etc. through PDS for legitimate ration-card holders & go ahead with removal of all subsidies for all types of fuel (incldg diesel & kerosene).

Diesel for city public transport, inter-city bus corporations & for railways can also be subsidized, but it will have to be in a round about way to avoid pilferage (such as bus corporations /railways filing for returns annually based on total consumption after paying up full costs through the year). Cost of travel by autos & taxis will also become dearer, forcing most of the public, including private companies' employees to resort to public buses. Bus & rail fares can be controlled with subsidies, though some price rise will occur due to the quantum of interests on the additional money blocked.

One option to meet costs of these subsidies is to hike fuel costs & tax private vehicles more than just needed for removal of subsidies - this will help further to reduce vehicle volumes.

The resultant price rises will effect the urban middle classes most & there is bound to be an uproar, but if this were cleverly planned in phases, it might eventually work.

There is bound to be a mad rush for ration cards & corruption would probably increase, but methods would have to be found to ensure that subsidy reaches only those in needy. So far, methods employed for doling out subsidies have been inefficient & subsidies are reaching those for whom it was never meant.

Tax diesel cars then

s_yajaman - 4 February, 2010 - 05:39

 Naveen,

This will cause a spike in prices but how long are we going to keep this game going especially considering we import 70% of our crude oil.  If Saudi or Venezuela subsidises domestic fuel prices it is because the produce crude.

In any case inflation will come in through the backdoor if the government continues to run deficits like this.  How - it will either print money or it will be forced to borrow from the market and this will cause interest rates to rise.

If diesel prices have to be subsidised, then at least tax diesel vehicles accordingly.  Assume they run 150,000 km and they save Rs 2/km because they benefit from cheap diesel.  

I like your idea for transport corporations that they first pay the full price and maybe every quarter they get a reimbursement.

Srivathsa

Subsidy must reach only the needy

Naveen - 4 February, 2010 - 08:20

Srivathsa,

Taxing diesel cars higher at purchase (or annually, if vehicle taxation is changed back to annual, preferably), or removal of subsidy for diesel for car use might work to some extent, but it will also have it's own problems & inefficiencies. For example, prices for diesel cars will go up by something like 3 lakhs over it's lifetime - this might not be acceptable to diesel car makers & users (such as private businesses) easily, & will add to inflation. If subsidy for diesel for only cars is removed, it would encourage a black market for subsidized diesel.

Kerosene can be made available at subsidized rates through PDS for bonafide ration-card holders. It can also be made available openly in the market at unsubsidized prices. This way, the needy will probably save a lot or even make some money through their sources from PDS, & this is better than the current leakage of benefits to those that never deserved it.

There is bound to be some inflation, but as you mentioned, how long are we going to keep this game going ? If cost of living can be kept under control for the needy, I think it would suffice whilst the urban middle & upper-middle classes will start paying the true costs for their lifestyles - this had to start at some point.

One of the observations of the report

mcadambi - 3 February, 2010 - 17:34

The Kirit Parikh committee observes:

"Subsidizing domestic consumers also did not incentivize them to economize on use of petroleum products. Rather, as prices remained low, and personal incomes rose, the demand for petroleum products such as petrol and diesel recorded double digit growth – higher than the GDP growth." 

This means the vehicular population increase over the past two decades in namma bengaluru was one part aided by artificially low petrol and diesel prices.

Once prices are deregulated and are actually set to rise, a negative feedback would set in motion in namma trafficu. People are doing to find it costly to run their cars and would switch to public transport.


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