A new report evaluates the impact of higher diesel prices on India’s road freight transport sector.

Published by the IISD Global Subsidies Initiative and Integrated Research and Action for Development(IRADe), the report finds that the trucking industry is vulnerable to higher fuel costs, and supports the earlier evidence that the fuel costs account for around 55 per cent of their total operating costs.

The study finds that the industry’s weakness is primarily grounded in structural constraints that have squeezed profit margins, while providing truckers with little leverage to pass on higher costs to clients. The study suggests that addressing these constraints—more so than subsidizing the cost of fuel—is the solution to the long-term profitability of the industry.

The industry suffers from oversupply due to the lack of training stipulations, relaxed registration requirements and easy financing. Eighty per cent of truck operators are small truckers who own less than five trucks. Such small operators cannot reap the benefits of economies of scale and cannot afford to obtain the necessary business information and thereby depend on brokers.

Due to oversupply of trucks and fierce competition, freight rates are mostly determined by demand for trucking and thus, increased fuel costs have little influence on them. But fuel costs being around 55 per cent of the total operating costs, truck operators are vulnerable to increased diesel price.

In the long term, structural changes need to be introduced in the industry, such as establishing modern computerized exchange networks to match demand and supply for haulage services (leading to less dominance of brokers), introducing training for truck operators, examining the finance to truck operators and improving mileage of trucks.

In the short-term, there are steps the central and state governments can take to ease the pressure on truckers as fuel prices rise. For example, toll plazas need to be modernized. If the toll stoppages are minimized, more trips are possible in a month, which would improve business for the industry.

Since January 2013, the Indian government has introduced gradual increases to the price of diesel. Fuel subsidies have significantly contributed to the deterioration of India’s fiscal balance. Last year, under-recoveries—the difference between a desired price (based on international prices and other cost elements) and the actual (depot) price charged to dealers—cost INR 81,192 crore (USD$15 billion).

A substantial amount of evidence suggests that a reduction in diesel under-recoveries will have significant fiscal and economic benefits to India’s economy as a whole. However, higher prices will negatively affect industry and diesel-intensive sectors—of which the trucking industry is one of the most obvious. The GSI believes that understanding these negative impacts—and responding to them appropriately—is critical to the success of the reform process.

The Impacts of India's Diesel Price Reforms on the Trucking Industry is available here: http://www.iisd.org/gsi/sites/default/files/ffs_india_irade_trucking.pdf