Oil Minister S Jaipal Reddy has proposed an additional excise duty of Rs 1.7 lakh on small diesel cars and Rs 2.55 lakh on bigger diesel cars. Diesel costs almost Rs 30 a litre less than petrol. Mr Reddy’s logic is to make buyers of diesel cars pay upfront the discounted value of what they would have saved on fuel over 10 years (Rs 3 lakh on small cars and Rs 4.5 lakh on bigger cars, assuming an annual run of 18,000 km and fuel efficiency of 18 km/litre for small cars and 12 km/litre for bigger cars). The minister feels this will offset subsidies, while not impacting the cost of transportation by rail or road, and therefore containing their inflationary effect. Diesel cars are already more expensive than their petrol variants. Of course, diesel engines are bigger in size and, therefore, more expensive to produce. But there is a huge element of profit for the car makers as well, profit which comes as a consequence of diesel subsidies, and which Mr Reddy would like to see in the government’s coffers, instead. With the rapid shift towards diesel in the last few years (diesel now makes up three-fourths of the market), prices of petrol cars have softened. Many car makers who lose money on the sale of petrol cars recover it in diesel cars. Naturally, car makers are aghast. Car sales fell 24 per cent in May on account of higher petrol prices and they fear that any increase in cost at this stage will simply kill the market.
While the tax may make sense in this context, the worry is that the United Progressive Alliance government is using it to, once again, avoid the central issue: the rationalisation of diesel subsidies. Those are a large contributor to the Centre’s rising fiscal deficit, which has had the effect of crowding out private investment. This year’s Economic Survey had a proposal that the government should fix the subsidy on diesel, and then let the oil marketing companies price the fuel freely. Instead of expanding the fuel subsidy endlessly every year, it will keep it under control. This is certainly a proposal worth looking at. It could be the first step towards full decontrol of diesel prices.
The world over, diesel cars account for not more than a fifth of the market. Globally, therefore, car makers spend the bulk of their research money on petrol engines. But in India, thanks to the skewed pricing, most local companies have had to invest afresh in diesel technologies. India will not emerge as a global hub for car production if its car makers focus innovative energy on diesel cars for the domestic market. That the government has realised that its subsidy is warping incentives for the private sector and creating distortions should not cause it to try and partially address those distortions, but instead reduce the reason for them. The do-good economics of subsidised diesel has long outlived its utility.