Diesel Racket Chokes India as Drivers Fill Up With Cooking Fuel

May 8 (Bloomberg) -- At a kiosk on the Trichy-Tanjore highway, one of southern India's main trucking routes, drivers of motorized rickshaws, scooters and vans belching black smoke line up to buy water bottles filled with green liquid.

The bottles contain diesel or gasoline diluted with kerosene, which the government subsidizes to provide low-cost cooking fuel for the nation's 600 million poor. Kiosks sell the mixture for as much as 10 percent less than gas stations do.

``My mileage gets hit, but it's cheap,'' says Kaja, who uses only one name, as he waits to fill his autorickshaw in Namakkal, Tamil Nadu, 380 kilometers (236 miles) southwest of Chennai.

Adulterated fuel is choking India's cities and costing the government $6.5 billion a year in wasted subsidies and lost taxes, says Bhamy Shenoy, who advised the U.S. Agency for International Development from 1997 to 2002. The bill may soar after the price Indian refiners paid for crude rose to an average of $110 a barrel in April from $80 in the previous 12 months.

``The lost revenue ends up in the pockets of politicians, officials and gangsters,'' says Shenoy, a Mysore, India-based consultant who worked for ConocoPhillips, the third-biggest U.S. refiner, before joining USAID. ``Adulteration is thriving because no one wants to lose this income.''

In the year ended March 31, India spent $19 billion to subsidize fuel, including $4.8 billion on kerosene, according to the oil ministry.

As much as half the 9.4 million tons of kerosene India produces each year ends up in adulterated motor fuel, Shenoy says. Kerosene, which isn't taxed, costs 9.05 rupees (22 cents) a liter (1.1 quarts) in Mumbai. Motorists pay 36.08 rupees for diesel, including tax.

Health Hazard

The sale of illegal fuel also undermines efforts to improve air quality.

Kerosene produced in India contains as much as 2,000 parts per million of sulfur, a major component of smog, exceeding the maximum 350 parts per million mandated for diesel sold in major cities, says Desikan, trustee of Chennai-based NGO Concert, which lobbies against fuel tampering. Desikan uses only one name.

``Adulterated fuel not only damages vehicles, it ruins people's health,'' says Anumita Roychowdhury, associate director at the New Delhi-based Centre for Science and Environment, who wrote a fuel tampering report for India's Supreme Court in 2003.

The scam works in various ways. Most commonly, criminals pay employees of regional distribution centers to dilute diesel and gasoline with kerosene, Desikan says.

``It costs only a few dollars to pay a depot manager and workers to mix it with motor fuel,'' he says. The black market depends on a network of corrupt officials, oil company workers, truckers and retailers, Desikan says.

Secret Depots

In other cases tankers are diverted to secret depots where kerosene and gasoline are mixed, then shipped to India's 34,000 official gas stations, where most of the adulterated fuel is sold, Shenoy says.

Racketeers have to pry open and replace locks on fuel tankers. Bharat Petroleum Corp., the country's second-biggest state refiner, imported tamper-proof locks and fastened global positioning system devices to its 4,000 tankers to monitor their movements, says Arun Singh, Bharat's deputy general manager for retail network planning. He wouldn't discuss their effectiveness or the extent of the problem.

``Adulteration is rampant, and oil companies will have to be held responsible,'' says Roychowdhury, who also blames government inaction.

Official Murdered

Oil companies deny corruption is endemic and say they are trying to curb racketeers.

``If we find any collusion between our employees and the system we take action against our own people,'' says A.M.K. Sinha, executive director for retail at Indian Oil Corp., the country's largest refiner.

Whistle-blowers risk their lives.

Manjunath Shanmugam, an Indian Oil sales officer, was shot dead in Lakhimpur Kheri in northern India on Nov. 19, 2005, after discovering that gas station owner Pawan Mittal was adulterating diesel. Mittal, who was sentenced to death, is appealing his murder conviction.

``There is big money involved, and in some cases it's run by gangsters,'' says Arun Balakrishnan, chairman of Hindustan Petroleum Corp., India's third-biggest state refiner. He wouldn't comment on allegations of official corruption.

In addition to $2.4 billion in wasted subsidies, adulterated fuel eats into sales of legal diesel, depriving India of $4.1 billion in tax revenue, according to Bloomberg calculations using government data.

M.S. Srinivasan, the oil ministry's top civil servant, says the national government isn't to blame.

``Not enough is being done to curb fuel adulteration, especially by state governments with whom the implementation lies,'' said Srinivasan, who declined to elaborate.

In 2006 the government ordered that a blue dye be put in kerosene so inspectors could see when fuel has been adulterated.

``It hasn't affected my supply,'' says Saravanan, a kiosk owner who uses only one name. ``Everyone is paid to stay quiet.''