Big car error

Interim Budget's partiality to sports utility vehicles

The interim Budget's decision to cut the excise duty on sports utility vehicles, or SUVs, from 30 per cent to 24 per cent will certainly benefit car makers (they have already reduced their price tags), but it raises some pertinent questions. Last year, while presenting the Budget for 2013-14, Finance Minister P Chidambaram had raised the duty on SUVs from 27 per cent to 30 per cent. What has changed since then and now to warrant the cut? If it has been done to stimulate the car market, why is the excise reduction on SUVs steeper than that for others: compact cars (12 per cent to eight per cent), mid-size sedans (24 per cent to 20 per cent) and large sedans (27 per cent to 24 per cent)?

SUVs are highly fuel-inefficient. Thus, a higher duty or road tax on SUVs makes sense. Worse, SUVs are the unintended beneficiaries of the diesel subsidy, which is meant for the poor. A large chunk of SUVs sold in the country run on diesel; petrol SUVs, though they cost less, have not caught the buyer's fancy. Private cars and utility vehicles (of which SUVs are a subset), a recent study by Nielsen shows, use 13.15 per cent of the diesel sold in the country. This makes them the second-largest diesel consumer after trucks (28.25 per cent), ahead of agriculture (13 per cent), industry (9.02 per cent) and the railways (3.24 per cent).

Though it can be argued that a large number of utility vehicles are used for mass transportation in rural areas, SUVs do gain from the subsidy. SUVs, even the compact versions, are expensive. These are, therefore, bought by well-off people. There is no reason to subsidise their fuel. At present, the under-recovery on every litre of diesel is Rs 7.39. So every time an SUV fills 50 litres, it gains a subsidy of almost Rs 370. Car makers have argued that diesel subsidy is on its way out, and once that happens, it will become a level playing field for all. But full decontrol is still some distance away. Given the overcharged political environment, it might not happen in a hurry.

The popularity of diesel cars - they account for more than 52 per cent of the market, though their share has shed a few percentage points after the partial decontrol of diesel prices - has environmental impact too. That's because the government's rules require BS-IV diesel to be sold only in 13 cities; the rest of the country is free to sell the BS-III variant. This is the main cause of the high emissions from diesel engines. But here the problem is the rules laid down by the government, and not the vehicles that run on diesel. To correct the situation, it is important for the government to move to a uniform norm for fuel quality as early as possible.