Over the past few years, the subject of diesel subsidy has fuelled major debate within and outside the government. The three major Oil Marketing Companies (OMCs) - Bharat Petroleum, Indian Oil and Hindustan Petroleum - have recorded losses of over Rs 40,000 crores in the Apr-Jun 2012 quarter. It is clear that oil import subsidies are unsustainable, however, even despite such huge losses, the government is reluctant to do away with it, anticipating cascading price hikes across industry that may result in widespread backlash. In this such a scenario, the under-recoveries of the OMCs further increase the government’s subsidy burden. While the effect of this may not materialise immediately, in the long term this is bound to have catastrophic repercussions on the economy and the OMCs. Even with the recent increase in the price of diesel, the government is looking at over Rs 1.8 lakh crore in under-recoveries from the OMCs due to fuel subsidies, of which diesel accounts for about 60 per cent. Recent protests have shown the sensitivity of this issue in the country; the price hike triggered a nation-wide protest against the government’s ‘anti-people, anti-poor’ reform. On the one hand, subsidy on diesel in sectors like agriculture and transport can be argued; on the other hand the passenger cars and industry have no case for the subsidised fuel.

In a recent parliament session, the Minister of State for Petroleum, RPN Singh, raised his concern over this issue. He said that around 16% of the 64.7 million tonnes of diesel sold in the country in 2011-2012 is used for fuelling passenger cars.

One logical solution to this problem, as many analysts have suggested, is the differential pricing of diesel for various segments of consumers. In theory, this is the best way forward; however, as seen in the past, intended recipients fail to reap the benefits of subsidised fuel because of poor implementation and gaps in the distribution system.

The technology solution

In the differential pricing system, the pricing of diesel could be divided into two segments. Subsidy can be given to any of the select segments such as agriculture, fishing boats, commercial transport fleets, state transport corporations and these segments and percentage of subsidy can be progressively reduced. There will be no subsidy on diesel for the other segments. This segmented pricing of diesel will reduce under-recoveries significantly and also ensure that subsidised fuel reaches the right beneficiaries.

The major obstacle with this type of fuel pricing is the implementation of a robust and foolproof mechanism that can ensure proper distribution of the subsidised fuel. This is where technology could be leveraged to address the issue of implementation.

Fuel cards

Each vehicle /person eligible for a subsidy will register for a fuel smartcard with an OMC. The smartcard captures information such as user details, usage category, and vehicle registration number and can be linked to an Aadhaar number. When the card holder pays for the subsidised fuel, his/her fuel card will be swiped at the fuel station. This will record the necessary information required for an audit trail.

To understand how this system will work, let us assume that a farmer enters a fuel station in his tractor. A closed circuit camera placed at the entry point of the fuel station automatically captures the tractor’s vehicle number (this kind of vehicle number capture system is already in place at many toll systems).

Once the camera captures the vehicle number, it is then processed automatically by a backend computer system which is integrated with the fuel card system. This process will verify that the vehicle is registered for subsidised fuel and is mapped to a fuel card. The user will pay for fuel at the normal rate and on a weekly basis the subsidised element will be credited back to the fuel card after determining the subsidy. This is similar to how money back options work in credit or debit cards.

If the same fuel card holder comes to the fuel station in a diesel car, the system will automatically determine that the vehicle is not eligible for subsidy and hence will be charged at the normal rate and no subsidised element will be credited to his fuel card. The system thus ensures that the correct category of usage gets the subsidy and guards against its abuse.

Also, through this system, the sale of subsidised diesel from the fuel station in jerry cans can be restricted to a predetermined volume (litres) per month per fuel card. This is to enable other categories of users eligible for subsidy such as small fishermen and farmers who take fuel in jerry cans for their boats or irrigation pumps. This system provides an effective way of ensuring that the subsidised fuel price is available to the right recipient segment.

Infrastructure and policy needs

In order to make differential pricing a possibility and thereby reduce under-recoveries and pressure on the Indian fiscal deficit, the government and OMCs have to work together to bring about the systemic change needed to effect this implementation. This would also require the government to make ground-breaking policy decisions and devise an effective roll out plan for such a project, which of course has a significant payback.

Most oil companies worldwide have implemented fuel card systems to meet a different need. In India it could well be a lifeline for oil companies and India’s economy. The million dollar question is – will the government open up this lifeline to OMCs?

(The author is Managing Director, Logica India)

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