Faced with criticism that rich buyers of diesel cars are benefiting from subsidies on the fuel, the government is considering imposing a higher excise duty on such motor vehicles. Sales of diesel cars and utility vehicles have been rising steadily in the last year and more thanks to the wide gulf between the retail prices of petrol and diesel. Historically in India, higher taxes have always made petrol more expensive than diesel. With the government in recent times being chary of raising the price of diesel due to its impact on inflation — the last increase was effected a year ago — the price gulf with petrol only widened further, especially because petrol prices continued to rise. Spotting an opportunity here, car manufacturers pushed diesel engine models in the market. Though considerably more expensive than their petrol variants — and there is no real economic justification for why this should be so — diesel cars were still attractive for consumers given the lower fuel costs. This naturally led to the increasing ‘dieselisation' of private motor transport. Other undeserving users getting subsidised include mobile phone companies who use diesel to power thousands of towers across the country.
While the revenues from the higher duty on diesel cars may be welcome to a funds-starved government and the move will also address critics who feel that rich car buyers are walking off with a subsidy aimed at the poor, a few questions nevertheless arise. Studies show that diesel cars as a category consume just between 12-15 per cent of all diesel sold in the country. Higher excise will help recoup some of the undeserved subsidy the owners of new cars will enjoy but what about the existing population of diesel cars? Surely they cannot continue to enjoy the subsidy. Perhaps the government ought to look into introducing a variable annual road tax on all cars with the levy on diesel cars pegged to neutralise the advantage of subsidised diesel. Car manufacturers insist that any punitive levy on diesel cars will affect the profitability of investments already made in plant and machinery. But the demand for diesel cars will also fall if the fuel subsidy were eliminated say, by a system of dual pricing. In Ireland, for example, farm diesel, with a green additive, sells for roughly €0.5 a litre less than regular diesel. If farm consumption has to be subsidised, dual pricing is an option that India should seriously consider, though stringent monitoring against diversion and resale is essential. By one estimate, roughly 10 per cent of all diesel sold in Ireland is illegal. Whatever the government decides, however, it must find a way to stop subsidising the owners of diesel motor cars.