Diesel pricing continues to vex policy makers

Diesel has been in the news with the Kirit Parikh-headed Integrated Research and Action for Development (IRADe) suggesting that an annual road tax be levied on both petrol and diesel for cars with a differential for diesel cars. If this goes through, the one-time road tax would stand abolished.

The Parikh panel has also reportedly suggested that subsidy on diesel could be capped at Rs 9 a litre after which a market price should be paid. Readers may recall that Parikh, a well-respected economist and a former member of the Planning Commission, had earlier suggested a tax of Rs 180,000 on diesel vehicles including SUVs but due to strong lobbying by the auto sector, this was brushed aside.

These are clear signs, if any were needed, that the issue of diesel pricing and its usage by the well-off sections of society, is an issue with which the Centre is grappling.

The reason for this is two-fold. CARE economist Madan Sabnavis says, “The first is that since diesel is heavily subsidised, and diesel cars are owned and run by higher-income groups, it is felt that this subsidy should not percolate to them. Therefore, they have to be made to pay a higher price. Second, the tax may help to reduce the incentive to shift to diesel engines and this will also help to control the level of environmental pollution.” The latter argument may be true for old trucks but carmakers would say in their defence that diesel is now widely considered a clean fuel.

Taxing times for car buyers

The Delhi government had, two years ago, hiked the registration charge on diesel by 25 percent on existing rates to discourage buyers from opting for diesel which was felt to be detrimental to the environment.

In an ideal situation, one would like to tax passenger car and UV users and not the truck users for diesel usage, but this is difficult. Countries like Malaysia, for example, have tried to have differential pricing at the retail outlet but in India’s case, this is not a logistically feasible idea. The sheer size of the country and the lack of adequate monitoring would mean that fuel could be sold in the black exacerbating, in the process, issues on availability and fuel quality.

By raising taxes on diesel-powered cars, which people prefer due to the fuel cost differential with petrol, it would help balance out sales between petrol and diesel. Parikh has suggested a diesel tax of as high as Rs 50,000 on SUVs to be levied as an annual road tax.



Sales of diesel vehicles have spiked over the last 18 months as a result of the spate of petrol hikes that has made operating a petrol car very expensive. The demand for diesel led to bookings, for example, of the new Maruti Swift at 80 percent in favour of it. Across passenger cars, diesel vehicle sales (based on October 2012 figures) account for just over 100,000 vehicles and if the road tax goes through, this would potentially be the base that such a tax would leverage.

It has been over two-and-a-half years since the government linked the price of petrol to international prices. Since then, prices have gone up by at 12 times and today, the differential between both fuels is approximately Rs 21. The effect this differential had on car sales was something that few OEMs anticipated. The swing to diesel was colossal as buyers (even those looking for pre-owned) dumped petrol for diesel. Carmakers scrambled to make enough models for a diesel-hungry market even as they had to make their suppliers ready for this swing.

However, the larger effect of this swing was that as petrol-powered cars sales fell, OEs weren’t ready to make deliveries for diesel. So a wait list emerged with models like the Swift and Dzire having a waiting period of 1-3 months. OEMs began offering discounts on petrol as well as launching a lower entry-level model such as the Honda City whose overall sales took a body blow. In policy circles of the government, the issue was how to ensure that those who use this fuel pay a price closer to its market value. The demand for a fuel that is hugely subsidised cannot be tackled with one brush policy that would affect the transport of goods that which could just fuel further inflation. Diesel is used for agricultural pumpsets and to run gensets in high-rise apartments where power supplies are erratic. Clearly, the need is for a policy that also monitors diesel usage and cuts on waste of a precious fuel.

Diesel dilemma

According to Sabnavis, the diesel subsidy is definitely an issue that is being seen alongside cooking gas or LPG and kerosene as the major part of fuel subsidy. There are, however, ways of trying to distinguish between trucks and diesel cars: why not impose a tax on all diesel cars based on approximate subsidy used by a car which can be collected with insurance. Alternatively, one can have differential charges for diesel in cities and towns as against those outside. Though, he admits, this is not the best way out as those on the fringe will fill up tanks outside the city, but one can still garner revenue and cut down on subsidy. The diesel debate will certainly continue given its enormous implications for government policy and the fight to control inflation. The government could add a sweetener to higher annual road tax by allocating a certain percentage, however, small to road building and upkeep.

BRIAN DE SOUZA