The Hindu Business Line : Diesel dilemma

Faced as it is with the galloping demand for diesel, and a near-scarcity of the fuel in several parts of the country in recent days, the Petroleum Ministry is considering asking Reliance Industries to sell a part of the diesel production from its Jamnagar refinery, an export-oriented unit (EOU), in the domestic market. The alternative is to import diesel, as indeed the oil marketing companies have been doing over the last year. The issue of domestic diesel production falli ng short of demand manifested itself soon after the Government conferred EOU status on the Jamnagar refinery in April 2007, taking away a large part of supply from the domestic market. As luck would have it, domestic demand started going up simultaneously, forcing the oil companies to import almost 2.5 million tonnes in 2007-08. The first four months of this fiscal have seen diesel demand grow by a sharp 18 per cent — following the 14 per cent growth in 2007-08 — and the oil companies have been going slow on imports, and understandably so, given that they lose money on every litre of diesel they sell.

It is in this backdrop that the Government is now weighing the option of asking Reliance to sell a part of its output in the domestic market. The only problem is that a number of tax issues need to be untangled before this can happen. If Reliance were to sell diesel in the Domestic Tariff Area (DTA) it will have to bear an excise duty of Rs 2 per litre plus 50 per cent of Customs duty leviable on diesel and Central sales tax for inter-State movement of diesel from Jamnagar to other consuming centres. In addition to this, it may also have to bear the freight for transportation from Jamnagar to oil companies’ depots across the country as the latter may not be willing to bear the burden. An option is for the Government to waive the duty imposts when Reliance sells in the domestic market but, then, why should it?

The entire idea of asking Reliance to sell diesel in the DTA thus appears flawed. Having granted EOU status to the refinery in its wisdom, the government ought not to fiddle with it now to suit its interests. The oil marketing companies have the option of buying from Reliance by paying the extra imposts but the issue is whether it is economical for them to do so. The alternative, of course, is to import as they have been doing in the last year even if it means a continuation of the irony of India being both an exporter and an importer of diesel. The Government should also examine ways of curbing the use of diesel for captive power generation, which is the main contributor to the galloping demand. While dual pricing for transport and other uses is an option, implementing it will not be easy.