Indian Railways should set up its own oil refinery – Assocham

Assocham, an industry chamber whose members include some of the biggest users of Indian Railways’ freight services, has called called for radical measures to protect the Railways from rising diesel prices.

The association pointed out that even as the decision to raise diesel prices for bulk customers may allow the government to cut back on subsidies, it will make railways operations unviable without raising freight prices.

To cope, the Railways has hiked freight charges by 5%. It has also suggested an automatic fuel price linkage in freight charges. “Such a move will have a cascading effect,” Assocham said.

The only way to meet the two objectives of avoiding a steep increase in railway fares and keeping the subsidy bill down was to allow the Railways to import and refine its own crude.

This way, the Indian Railways can avoid paying about 20-25% sales and other local taxes on diesel. The Railways, run as a government department, is the biggest consumer of diesel in India, and runs a substantial portion of its trains on the fuel.

It has, however, switched most of its trains over to electricity over the past two decades.

India’s subsidy bill is estimated at over Rs 2 lakh crore (Rs 2,00,000 crore or $40 billion) — or about one fifth of the total estimated tax revenue of the Government of India during the next year.

Coupled with huge interest payments, the subsidies will account for half of the total tax revenue, Assocham pointed out.

“The interest payments alone will take away of Rs 3.71 crore, claiming over 30 per cent of the total tax revenue of Rs 12.35 lakh crore in the next financial year. After adding Rs 2.31 lakh crore , the interest and subsidy bill alone will go up to Rs 6.12 crore almost putting a charge of about 50 per cent on the central government’s tax revenue,” it pointed out.

The government of India had recently allowed oil companies to charge the unsubsidized (or market) price for diesel and petrol sales to bulk consumers such as the Indian Railways, state-government-owned transport companies etc.. It also allowed oil companies to reduce diesel subsidies to consumers by Rs 0.50 per month per litre. While the move will reduce diesel-related subsidy costs, the price of crude oil has been rising in the past several weeks, negating some of the effect of the changes.

The chamber, however, warned that an earlier proposal to shield airlines from the rising prices by the direct import of jet fuel did not take off. “But it might even work for the Railways since it has a readymade and captive transportation infrastructure,” it said.

Various taxes and import duties make up about half the price of petrol in India. For diesel, the duties and taxes are estimated at about one-third.

Setting up a refinery for own-use would allow the Railways to bypass most of the taxes except the import duty, which is usually about 5% for commodities such as crude oil. Three years earlier, the Indian Government had tried cutting the import duty on crude oil to 0 from 5%, though it is not clear whether it has since been reimposed.