Hike in the fuel price will bring down the subsidy bill, says Crisil

Increase in diesel price alone will help bring down the fuel subsidy bill, according to Crisil Research.

For bringing about a sustainable reduction in the subsidy burden, the government need to not only hike diesel price, but also ensure thereafter that the price moves in line with that of crude oil. The agency said this while analysing the benefits of imposing a one-time tax on new diesel cars and utility vehicles at the time of their sale or an annual usage-based levy on existing diesel cars and UVs (utility vehicles).

Noting that Union Budget 2012-13 had set stringent targets to contain the subsidy bill, a third of which were petroleum subsidies, an opinion paper of Crisil Research said diesel cars and UVs accounted for just over a tenth of the total diesel consumption. The proposed levy was aimed to reduce the preference for these vehicles and thereby bring down diesel consumption.

It would mean that other vehicles such as trucks and buses, which consume more diesel, remain untaxed.

Of the total diesel consumed in 2011-12, cars and UVs used up only 12 per cent, a third of what trucks and buses consumed.

Crisil Research arrived at the share of diesel use by cars and UVs based on an estimated population of 3.6 million diesel cars in the country as of March 2012. This formed about 23 per cent of the total population of cars and utility vehicles.

“Of this, we have estimated that 47 per cent of the cars are for personal use, and the remainder, for commercial use,” the paper said.

With the one-time tax on new vehicles, the government would be able to collect a sum equal to only 12-15 per cent of the total subsidy bill. Moreover, levying a common tax would be difficult considering that the life, mileage and distance travelled would be different for personal use and commercial use vehicles cars and UVs.

An annual usage-based tax on all diesel cars and UVs would be difficult, in terms of collection and monitoring non-payments, as the Regional Transport Offices (RTOs) that would be assigned the task were fragmented and not well equipped, the Crisil paper said.

Making a strong case for the government biting the diesel deregulation bullet and increasing the price of the fuel, by at least Rs.9 a litre, Crisil Research adds that hike in the fuel price would also stoke inflation.

Keywords: diesel price