Diesel dilemma

The Centre continues to be divided over the implementation of its diesel policy. This debate took centrestage at the 51st Annual Convention of the Society of Indian Automobile Manufacturers (SIAM) in New Delhi on September 7, where Montek Singh Ahluwalia, deputy chairman of the Planning Commission, favoured decontrol of diesel to bring parity in diesel and petrol pricing after taking into account high energy costs.

On the other hand, Praful Patel, Union minister of Heavy Industries and Public Enterprises (and a former aviation minister), batted for the continuation of diesel subsidies, saying it came under the government’s social obligations to do so. He said there is a need to reconsider diesel’s image as a 'dirty' fuel. Dr Pawan Goenka, outgoing president of SIAM has asked the automotive sector to urge the government to evolve a national plan and strategy for using diesel in the transport sector. Rather than discourage the use of diesel for personal transport due to the subsidy involved, a national plan is required. Due to its advantages of better fuel efficiency, such a strategy could become a valuable tool in reducing the carbon footprint of the industry as well as cutting down the overall fuel consumption by the transport sector. Hence, a renewed focus is the need of the hour to strengthen the infrastructure for CNG and LPG in the country, he feels.

SIAM has been working with the Union ministry of road transport and highways and the Bureau of Energy Efficiency to evolve the mandatory fuel efficiency standards for passenger cars. This work is in the final stages.

As the government dilly dallies over its diesel pricing policy, car manufacturers are a worried lot. In the absence of a definitive policy by the Centre on it, they are unsure of taking a final decision on whether to invest in diesel engine technology or not.

For instance, Toyota Kirloskar Motor which recently rolled out its diesel Etios and Liva models, has put its plans for setting up a diesel engine plant for the Etios platform on hold till the government’s stand on the issue is clear. Whether the government deregulates or subsidises diesel gains significance as the demand for petrol and diesel vehicles will be affected by it. Hence, a manufacturer will be justified in investing in a diesel engine facility based only on sales volumes for it.

R C Bhargava, chairman of Maruti Suzuki, says the carmaker is not concerned about whether the Centre decontrols or continues to subsidise diesel. But a final and long-term decision ranging between 10 to 15 years on the fuel policy has to be clarified by the government so that OEs can start planning their investments accordingly.

As investments and facilities for both diesel and petrol engines are entirely different and a diesel line cannot be harnessed for producing petrol engines, the issue begs for clarity. India’s largest car exporter, Hyundai Motor India which is investing in a new diesel engine plant in Chennai with an investment of Rs 400 crore is also seeking an end to this ambiguity. It currently imports engines for the i20 and the Verna from its Korean plant.

“ We want the government to lay out a clear-cut road map for retail prices of both petrol and diesel. As a manufacturer, we need this clarity to take prudent capital expenditure decisions. Having said that, I must underscore that keeping in mind the growth of the automobile market, Hyundai is drawing up plans to enhance its engine capacity in India,” reiterates ArvindSaxena, director marketing and sales, HMIL.

The issue of diesel pricing has been a hornet’s nest for the government as it is still undecided whether to de-regulate it or continue subsidising it. While the government decontrolled petrol prices in June last year, it put on hold a similar decision for diesel.

Under the Petroleum and Natural Gas Act of 2006, neither the regulator nor the government have any powers to regulate the price of petrol or petroleum products or gas. The government in an administrative capacity is fixing prices by directing their State-controlled oil companies to keep petrol and diesel at a particular price for the consumers. Diesel has so far been protected from unwieldy price hikes so as to rein in inflation, a fallout of a rise in prices of essential commodities transported by trucks that primarily run on diesel.

The auto industry, per se, is not against dual pricing so long as the interests of the rural sector are addressed, says Vishnu Mathur, director general of SIAM. “We are against black marketing of diesel. Hence, a good system that streamlines the issue needs to be put in place,” he points out. Earlier, Jairam Ramesh, former environment minister had termed diesel-guzzling SUVs as 'criminal', pitching for sending these off-roaders off the road. Some industry captains present at the SIAM Convention, who were witness to the clash of government interests, say that it is not an easy solution to be worked out but sooner or later, diesel will have to be de-regulated.

An option mooted by them is using identification numbers for reimbursing subsidy on diesel for those paying market prices for ensuring social parity. Another alternative is of continuing with the diesel subsidy and maintaining a dual diesel pricing with high-powered luxury diesel cars supplied diesel at market rates and subsidised rates for agri-irrigation needs. For instance, fuel stations can be directed to dispense diesel to premium diesel-engined cars at market rates while commercial vehicles and tractors that primarily operate on diesel fuel can be priced at a subsidised rate, feels K Jeyavelraj, specialist in validation, Robert Bosch India. This could put a cap on inflationary trends, especially when inflation has been on the forward march for the entire year. Jeyavelraj's suggestion is of running a pilot project in one city to test the efficiency of dual pricing and extending it to other cities depending on how the experiment works out.

Last month, Union finance minister Pranab Mukherjee had ruled out dual pricing for diesel, which could have made the fuel expensive for passenger car owners. He also sought to allay fears that there was any proposal to raise duties to make up any shortfall in tax revenues. Meanwhile, the diesel price deregulation report that had been submitted to the Manmohan Singh government last year by the Kirit Parikh Committee on oil pricing had broached the issue of total decontrol of diesel and petrol fuels to curb under-recoveries of oil companies and to cut the government’s fiscal deficit. The panel had recommended an immediate increase in prices of kerosene by Rs 6 per litre and LPG rates by Rs 100 a cylinder last year. Parikh had then pegged the losses of State-run oil marketing companies at Rs 40,000 crore on account of having to sell transport fuels at below cost. The panel had suggested freeing petrol prices at refinery and at retail level, suggesting that retail diesel prices be market driven.

State-run Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum are losing around Rs 235 crore per day on selling diesel, LPG and kerosene below cost. The oil marketing companies current under-recoveries are Rs 4.97 per litre on diesel, Rs 3 per litre on petrol, Rs 23.74 per litre on PDS kerosene and Rs 247 per cylinder of domestic LPG. In July last year, the Cabinet had taken a decision to meet the entire revenue loss of public sector oil marketing companies on cooking gas and kerosene either through oil bonds or cash. Parikh spoke to Autocar Professional on the issue after the differences of opinion in the government came out in the open saying that his report had suggested that besides raising diesel prices, excise duty should be imposed on diesel-engined cars. However, the government had shot it down as it felt that this would impact vehicle sales and also have a negative effect on inflation due to increase in distribution costs.

The solution, he feels, is to decontrol diesel in such a way that it has a moderate inflationary impact. “Decontrol does not mean raising prices. The government can fix the subsidy according to per litre of diesel price irrespective of rising market prices of diesel. And oil marketing companies can adjust their prices accordingly.” This would ensure that the price hike did not come as a one-time shock to consumers and could be absorbed slowly into the system. Moreover, Parikh suggests that road tax be introduced on luxury cars, but the one-time upfront road tax should be removed as it will increase vehicle prices. Instead, an annual road tax can be imposed that is enforced differentially on petrol and diesel vehicles, depending on the kilometres travelled during a year by the vehicle.

The government has been modulating the retail selling price of diesel, PDS kerosene and domestic LPG to insulate the common man from the impact of the rise in oil prices in the international market and in view of the domestic inflationary conditions. Petrol prices have risen by 21 percent since they were freed from government control in June last year. The price of petrol in Delhi was Rs 51.43 a litre last June and now costs around Rs 63.70 a litre in the capital.

Earlier, L Mansingh, chairperson of the Petroleum and Natural Gas Regulatory Board, had expressed misgivings about de-regulating one product and leaving the others in the same energy basket, as it would lead to all kinds of complications. Already queues in front of CNG dispensing stations have become the order of the day every time petrol prices go up. Simultaneously, he had questioned the rationale of subsidising people driving expensive diesel SUVs or Mercedes-Benz or BMW cars. So, as the government stretches its diesel dilemma further, and market dynamics tilt the scales further in favour of diesel cars (about 80 percent of OE portfolios are believed to favour diesel) for the consumers, both manufacturers and consumers hanker for a clear diesel policy to drive their future plans.

So, is it not time that the Centre gets its act together and clarifies its stand on diesel pricing so as to put the stakeholders concerned out of their agony?