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.
Keywords: diesel cars, diesel subsidy, excise duty
With the recent petrol hike people tend to buy more Diesel vehicles.It results in high Diesel comsumption hence more subsidy burden will increase on Government.Hiking Excise duty is one the best possible options Govt. has right now otherwise Diesel deregulation leads to more Inflation which adds to Current Economic Woes.A possible long term solution will be to develop better public transport ,infrastructure and find alternate sources of Energy.
There is good reason for Diesel engines being more expensive than petrol
engines due to the high compression ratio.
What I don't understand is how the diesel price is not getting affected
along with petrol. The entire situation seems like more of a fiction
than truth.
In an Ideal economic system there should be inherent incentives
driving people to follow what is good for the health of an economy.For
instance an extremely efficient public transport system will
discourage people from using cars.It is neither feasible nor fair to
tax people who are using cars.Not all car buyers are rich and not all
bike riders have a genuine reason to be on roads. Too many rules make
the system more complicated to be well regulated and they also need
too many exceptions.Well connected and safe cycling lanes will attract
a lot of people to cycle to work. Holland has shown how this can be
done and Hyderabad is following suit.
i am not sure if people realize what they are talking about.
the situation of our country holds thus: if we increase the excise duty on Diesel Cars, the it will slow the growth of an already slowing sector. this would seriously slow down the GDP growth and increase our current account deficit. if we remove the subsidy on Diesel then it would directly affect transportation cost, triggering a sharp rise in inflation. if we bring in a dual pricing policy then it will open the flood gates for more corruption and black marketing. the fact of the matter is that we have crippled our country to such an extent that there is no way out( atleast not an easy one). i am sick of placing my future and dreams in the hands of these looters who 'rule' our country( and that is the tragedy because politicians should govern and not rule).
@perumal
a person working in an MNC for a proper wage,meeting heavy expenditures of metro cities, residing in a rented house, going to office by a car which he bought on a bank loan cant be taken a rich one . I think you classify poverty into LIG, MIG and HIG. You should look at the broader classification of non poor ie lower MIG, upper MIG, millionare, billionare. Our economy cant prosper without giving adequate chances to other non poor. Dont you think you consider MIGs a mere tax payer without being a beneficiary on any prospect.
The only solution is to bring diesel prices to market parity. Only that will encourage efficient use of diesel in the vehicles that are the prominent users. The bugaboo of food inflation is constantly flogged to prevent market pricing for diesel. Consider a simple calculation; a food commodity (or vegetables) travels 100km before reaching the consumer, say a 5 ton truck gives 4km per liter of diesel, priced at 50 Rs/ltr. So for 100km the truck needs 25 liters of fuel. So transporting 5000 kgs costs Rs1250 - or 20 paise per kg. So even if the cost of diesel were to go to Rs75 per liter, the 20paise will become 30paise. These numbers are much smaller than the actual fluctuation of vegetable prices. True beneficiaries of the diesel subsidy, do not want to lose it and do not want to make their transportation more efficient. Market pricing will encourage more efficient trucks, more use of goods trains, lets people choose the right fuel for their car and make public transport attractive.
Why dual pricing will not work - Take the example of LPG cylinders; we already have commercial LPG and subsidized home LPG. However many restaurants openly use home LPG cylinders. The government cannot monitor every cylinder of LPG and every liter of diesel. Legitimate customers of subsidized LPG have to wait for 20 days to get a cylinder of LPG in places like Bangalore, whereas if you have the right connections you can get the same delivered in a day. What is an unfortunate outcome of this pricing policy is that if a domestic consumer of LPG is willing to pay the actual market price of a LPG cylinder, there is no easy way to get it. Similarly there are massive diversions of Kerosene regardless of what coloring additive is added, the distribution system will always find a way of extracting a subsidized commodity into the open market - at the cost of the government, the tax payer and the targeted end user of a subsidized commodity.
This is a very disappointing editorial Mr. Varadarajan. While you articulate the dilemma, the solutions you propose are neither practical nor do they address the real issue behind diesel pricing. The government suggestion of taxing new diesel cars is unfair to a new car buyers, hurts carmakers and their employees, and as you point out, exclude existing diesel cars. It is also unscientific to blame diesel engines which have made huge progress in efficiency and emissions. Diesel engines can use vegetable oils instead of mineral diesel. Dual pricing is not workable as several commenters have pointed out. It will lead to the same misuse that Kerosene or LPG are facing. A massive bureaucracy will have to be established to check the use of subsidized diesel in private vehicles and the ensuing corruption will be impossible to manage. Further, this will not do much to reduce overall diesel consumption as cars account for a small percentage of the diesel consumption.
Completely deregulating all fuels in a staggered manner within 12-18months will be a very good strategy. The impact on inflation will be there, but will be temporary, demand will adjust to cheaper modes of transport - Public or Eco friendly modes of transport. This will dampen the impact on inflation. Government must also ensure that people pay for parking, which they don't do now. Any more targeted subsidies like "farm diesel" would only be an additional hole in our budget, we must not make such mistakes. Government must improve public transport in all metros and major cities. Tax holidays must be announced for eco-friendly technologies and life styles. We must hit the delete button on the "pink revolution" that the Government is investing on, that will save us from tons of Methane, and wasteful conversion of forest and agricultural land for pastures, instead we must exploit our natural potential and seek to export grains and milk.
@Shashi_Kumar you don't seem to get the point. The hindu makes a valid point, its you who is belting out tripe. I would think that its because you are one of the owners of diesel cars A person buying a diesel car is one who can atleast pay 5 lakhs for a mode of personal transport. In India where as per montek people living on Rs 35 a day are middle class, that is definitely rich. Not that petrol car owners are rich but they are not given any subsidy. On top of that there is a tax on petrol to subsidize diesel as well. Whatever that problem with diesel cars or whatever its cost, State does not need to subsidize the fuel used for personal transport. Also the taxes on petrol are to subsidize diesel and once this is corrected, petrol prices also will come down. This will remove most of the advantages of diesel cars. The final nail in the coffin would be turbocharged petrol engines of smaller displacement giving good fuel efficiency and better power with more refinement and less pollution.
This article is rather in its skewed in its presentation. Diesel car owners are rich??? As if petrol car owners are poor? It is just that diesel car owners (many of them)stretched themselves a little to gain some economy in running costs,probably by sacrificing on the goodies that higher variants offer. Diesel cars offer better efficiencies, generally,than their petrol variants. Lastly, when the diesel engine does get opened up after some service, the owner dishes out far more than his petrol brother, on top of the generally higher maintenance cost that he has to bear. The author does not seem to feel any bitterness on that front. Hindu is advised to go through some highly commendable Indian websites on cars, before belting out such tripe.
To help the public transport it the right time to impose the correct tax on diesel. So that, the word subsidy for diesel will come to an end. The public will also understand the meaning of cost of diesel. Taking of car for buying a kothumber and kadipatha in the veg stall will become more effective.Another reason is that the central government forgot about JNNURM scheme of giving vehicles to transport corporations to provide ultra deluxe vehicles at cheaper cost to public.Hence a check on these state transport is also vital. We are saying but who has to bell the cat. it is in deaf mens ears.
Dual pricing is the short term solution. All other options are all longterm and would have a variety of consequences. Using price to regulate consumption has been tried before in India many decades ago and that did not work. Let us work on a short term and longterm solution. The long ten solution has to be to come out of the policy of subsidies. It is well known that subsidies only distort consumption and you get into a vicious spiral. To keep things simple and straightforward and in a transparent way is the only long term solution. It will encourage investment and lead to investor confidence. Price of oil is not under anyone's control. Weather is not under anybody's control much as our politicians would like t play. What is needed is a National Transport Strategy and policy. We also need a National Fuel Policy. Formulate them, debate and discuss, and implement them. It will take time but we will have and we need a stable predictable solution. Adhocism is not in anybody's interest.
Here is New Zealand, diesel vehicle users have to pay Road User Charges (RUC) to the transport administration and this fee is tagged to the number of Kilometers they drive. In India, the Govt should NOT offer subsidy to private owners. Vehicles used in public interest and to transport essential commodities should enjoy subsidy. Again, in the Indian context, this is meant to be misused - although the percentage might be less. Finally, yes, the gap between diesel and petrol should be fixed in such a way the the cost is not passed on to essential commodities. The Govt should not worry about whiners in the Auto industry. The Auto industry (like US) are meant to deplete the earth's resource and spell a dooms day.
Thought provoking.
I think it is important to understand if the solution will be practical. For e.g. excise duty on
new cars can be easily implemented, however, retrospective implementation will be tough as
it will be a huge drive to make people pay. It might possibly end up being a route to
corruption.
What else? In my opinion public transportation is the way to go. Any amount of taxes or price
additives will not sway customers. Do people think twice before paying 1-1.5L extra for a
Swift Diesel? They do not; we have strong belief in EMIs. If you have AC buses running on
popular office routes, every 10 minutes with strong adherence to time and "no standing" rule,
who wouldn't buy the service? Add another service - " Internet" and you will see office goers
flock to board. You've got to sell it
Action Item: build a service but sell it harder
I am also curious about one idea here: @Rashmi - how do you plan to implement multi-price
scenario as suggested by you
The Govt is barking up the wrong tree by thinking of imposing additional excise duty on the sale of diesel cars. The need is to rationalise the price of diesel into popular and premium. Diesel used for public transport and the needy should be priced lower than that used by those who can afford to pay for petrol but are enjoying the lower diesel cost by opting for purchase of diesel cars. It is common knowledge that wear and tear of diesel cars is higher than that of petrol cars and have lower resale value. The key point is how the dual pricing would be administered efficiently without leakage of subsidised diesel to those who do not need the subsidised diesel. Control over sale through petrol pumps with the car registration number indicated in the bill is one way of ensuring the dual pricing mechanism with appropriate symbols for the luxury cars. The sooner the Govt decides on this burning issue the better for the country.
I appreciate the good points in this Editorial. We have two challenges and the possible and
pragmatic solutions are;
1. How to recover the diesel subsidy going to rich who own diesel cars?
-- duel pricing is the obvious idea but deploying it in India will open up black market
-- annual 'diesel subsidy tax' on all diesel cars / luxury vehicles is the way to go
2. How to control traffic congestion and encourage people to take public transport?
Some successful best practices are avl as options from other countries
--declare max age for vehicles i.e. 10 / 15 years and take older ones off the road; this will
sustain car sales, manufacturing and also reduce pollution
--estimate and limit the max number of vehicles to be sold in a state every year; auction
these permits to buy through online; use this money to improve public transport infrastructure
Here is an alternative. Government should complete the UID process first. Then we will be knowing who are the farmers, how much land they own and normally how much diesel they need per year (on an avg)for doing agricultural operation. Based on above data we can fix the highest limit on volume of diesel for each farmer.This limit can be revised every year based on monsoon forecast and other relevant factors. Now free diesel from subsidies& let it's prices be determined by market forces. Farmers will purchase diesel from market at existing market prices. But he will be reimbursed for the extra payment(within the limit decided earlier). This will have two benefits. First, subsidies will reach only to the targeted one. Second, it will also lead to fuel efficiency as farmers are not going to get subsidies for extra amount of diesel consumed over and above limit. It will help us providing targeted subsidies & keeping a check on total amount of subsidies.
Where subsidized fuel is needed, give a cash subsidy in the form of tokens to the deserving! Why subsidize all outlets of diesel?
The government can launch some schemes in which diesel users, using it only for agriculture, transport ,construction etc. can avail subsidies with some predefined limits on daily usage.Where as the diesel being used in private owned cars or other general purposive should be sans subsidy.It may be in form of some smart diesel cards or some central database driven system linked with fuel stations, in which all the diesel vehicles registered are subsidised according to their use and purpose.However, it's implementation can be difficult, to say the least will be having loopholes in starting which can be fixed with time , but it is something which the govt. can't overlook in the near future.
Economic engineering ia fraught with risks and skewing of economic growth. It ia preferable to permit price signals steer growth of investment and consumption patterns. Given the size and variations present in a billion strong eco-structure, policy based on specifics like diesel pricing is bound to create anamolies. What remains beneath the surface are disincentives to more viable evolution of other technologies e.g.here it would be electrical, gas based, solar-battery, wind power and other alternatives which can assist agriculture in pumping water and for other agri-work needs. The capability to comprehend complexity in the economic environment of the state and abstract policies which are not interfering with the logic of market forces which promote productivity growth, enable innovation and create bias towards local resources is the need for pacing up development. Such ideals are most practical approaches as well, sound theory always produce better results in practice.
@Akshat,
"The middle class who is switching to dieselised vehicles to maintain thier monthly living will surely be adversly affected by this measure."
i guess the dieselised vehicles you are talking about are cars. i am not aware of any two wheelers than run on diesel. if they are buying cars, they are not middle class. they can afford to pay more for the fuel.
Mr.Apoorv Agarwal's suggestion of introducing fuel tax on diesel cars is really worth
considering.It should be collected once in three months & such tax should be revised
@quarterly interval to match if there is any price raise in other petroleum products.
Increasing the price of diesel cars will only hamper the growth of the industry.
Sir, I beg to disagree with one of the suggestions made in the editorial that annual road tax has to be revised and levied on the diesel car users just because the government can not increase the diesel prices under one category. It should not be forgotten that diesel cars are used primarily to reduce the fuel charges by middle class also. This means indirect diesel price rise to the middle class. Yes, it will come on par with petrol and the suggestion is theoretically correct, but is a treatment of the disease rather than cure. One side of the story is that some countries have already banned sale of diesel cars for general public, some others have different pricing schemes. But the other side is that majority of such countries have a very good, can be trusted, public transport facility. If the government provides its people with increased infrastructure on public transport and then levies extra road tax, or for that matter, dual pricing, it is welcome.
In addition to a additional duty on new diesel cars a levy should also be imposed on existing cars. The levy must be based on the subsidy that is likely to be provided over the lifetime of the vehicle or at least over the next five years. More importantly levy must be imposed on large DG sets to compensate for the subsidy. Finally, if exporters can be refunded the taxes, why not state transport corporations? This will enable the states to provide cheaper public transport. A cut in excise duty and other taxes on items of consumption by the poor can be followed by an increase in price of diesel. Let us remember that every rupee of subsidy that we get actually costs a lot more and takes away from what should go to those who really need it.
Here's an alternate view, the diesel subsidy enjoyed by rich is not actually a subsidy, they are the ones who are paying taxes,so it's their own money, the poor are contributing so little but consuming a lot ,while electing worthless people to rule them.hence they remain poor for ever? So let's be careful , the rich are not the villains, it's the poor who have misused the vote, elected charlatans and thieves to rule and ruin the country.
Increasing the excise duty on cars will need not effect the targeted rich group but it would surely be a big burden on pockets of the middle class. The middle class who is switching to dieselised vehicles to maintain thier monthly living will surely be adversly affected by this measure. If something offer to be changed it is the pattern of distribution of subsidy. It must be ensured that subsidized products are distributed only to targeted population. Moreover quantity of diesel distributed should be evaluated as surplus incentives may lead their wastage. The only sector where subsidy if checked, would be affected is the transport sector. We need to find an alternative transport system otherwise these subsidies will push back our economy into graveyard.
Dual Pricing will not work in India. Best is, like road tax and insurance, government has to impose some tax annually or quarterly for diesel cars and generators.
Dual pricing like Canada with Green additive, but will such measures work or will give rise to black market. The consumption of diesel is not for the diesel cars but lack of open market policy. Let the economy rule the price and Govt. keep the taxation on fuel rationalised. The captive power generation must be suitably increased to stop the use of generators, which is rampant today. Its better to allow the economy control to determine the fuel pricing and also reduce fuel taxation by fixing a monetary limit as percentage taxation further inflates the price of the fuel. The fuel economy of big diesel car along with maintenance cost is not a good choice for those who use car sparingly and for those who use the car regularly, are rich and will go on using irrespective of increase in the price of diesel. Let us not allow further inflation by giving a cause to the Govt to hike diesel price which will give rise to inflation and increase the cost of livelihood.
We can never imagine a conducive gesture for the poor from the UPA2 government and its bureaucrats, who have the temerity to pay Rs. 35 lakhs on a toilet renovation in one of the offices!
This would be a very good decision. Now diesel car owners are enjoying undeserved subsidies. Government should either impose higher excise duty or implement dual pricing on diesel. Why do petrol vehicle owners always need to suffer???
Here only economics is fussed with hard statistics.Diesel is consumed much more in percentage quantification in even agriculture and DG sets in industrial establishments.Even we can forget to include the consumption in public transportation sector! Let us not talk nonsense like Dr Ahluwalia of planning commission who goes on to justify installation of luxury toilets in Yojana Bhavan!
Any proposal to hike prices of petro-products in India is bound to kick up a storm. One of the reasons for this kind of public response is that the oil marketing companies are not transparent as to production, import, demand, supply and consumption situation as well as the pricing mechanism. Taking the public into confidence, concerted efforts to augment the supplies, and and constant rationalization of prices are sure to go a long way in avoiding public ire and consequent economic and political fall-outs.
In india, goverment is like to suck peoples money by increasing the price of diesel and petrol. Leaders are not thinking of common men. In other country has a low price of fuel, why we have that much high?
I am not a fan of criticizing the government, but rather have a point to make to one of the useful suggestions above. I think the idea of 'forcing' more and more people to use public transport is indeed a good one. But, only single-directed action such as exorbitantly increasing the prices of cars would not be enough. Alternatives are always to be thought about- only increasing prices of private vehicles, without increasing the quality as well as quantity of Public Transport would only leave people more agitated and stressed without any reliable option to travel, esp for work. Let's learn from the more evolved countries. The ones which have a great public transport system are also the ones which have relatively controlled private traffic. The idea of having a dual price system for diesel really appealed to me. Just like having various tax slabs for different income groups-we can have various diesel price slabs too. Thus, avoiding being unfair.
It is not new phenomenon.Govt knows it for long time but as usual no
new thinking on this issue .Lame excuse of Crude prices and Rupee
value sliding all the time is not acceptable .We are unable understand
exactly pricing mechanism.Govt must publish white paper on
diesel,petrol and LPG pricing and consumption.Shale gas can
revolutionise price structure.MAIN ISSUE FOR govt is it's inaction and
failure to increase adequate power capacities.This has increased
diesel consumption of diesel Generators and diesel pumps .Install
standbye generators for Electricity Boards supply and give subisidy to
Eletricity Boards Diesel Generating sets which will reduce problem of
Dual Pricing
The latest reports from Delhi indicate that although the Central government has finally woken up to the dangers of continuing the populist policy of fixing a relatively low price of diesel. It is rather surprising that the diesel vehicle manufacturers want the subsidized price of diesel to continue; they must be told that they cannot expect low diesel price to boost their sales in future. Secondly, the argument that their investments in plants to make diesel driven cars and other vehicles would be adversely affected is not at all tenable. The government should not succumb to diesel vehicle manufacturers' lobbying. Current policy of increasing only the petrol price in an ad-hoc fashion is creating many distortions. The petroleum ministry should study whether long term inflationary impact of increasing prices of all petroleum products can be better managed by replacing the existing ad-volarem duties by specific duties and taxes.
Dual pricing for diesel is the need of the hour, though illegal sale
cannot be eliminated in that case, government has to find some
innovative methods to reduce that. Someone has to bell the cat to stop
the diesel car owners and others to take unfair advantage of the
subsidised diesel.
Tax with retrospective effect for diesel car buyers.May be 5 yrs.Our Govt is never proactive in thinking.
It is right that undue benefit of low fuel prices is being transferred
to the riches, which in turn is affecting the Petrol prices. Another
way by which govt. can realize the lost revenues from diesel prices is
by introducing a fuel tax on diesel engine cars that could serve as a
quarterly, biannual or an annual license for the diesel engine cars.
Possession of such license can be made compulsory. Anyone not
possessing such license can be fined heavily or the car can be
impounded. This could serve as another traffic rule. Implementation of
such an system would be the key.
Dear Sir,
Its really embarrassing that hike in petrol prices is
quite frequent but not diesel. Though diesel consumption in motor
vehicle is only 15-20% but that 20% does not deserve subsidy the way
petrol buyers deserve. Diesel subsidy might be keeping in mind 80% area
of its consumption but hike in petrol prices raise prices all essential
commodities afflicting all from top to bottom. so reason for hike in
petrol not in diesel is not justified.
In India everything enters through the corruption door. How this can be avoided while implementing the dual pricing for diesel is the moot point.
Whether govt. imposes higher excise on diesel cars or lift the
subsidies on diesel consumed by these cars is bound to affect the
manufacturing and job sector. The suggestion should be to make the
subsidy more focused and exclusive to farmers and goods carrier which
boost our agriculture sector thwart inflation. But how to do this is a
problem. The selective subsidy model may cause huge uproar and a
rollback. So, the another way may be to outright lift the subsidies on
diesel in a phased manner in coming five years time or so. This should
be done simultaneously with electrification of irrigation methods and
better management of water resources and rain water harvesting. And
these things are already in govt consideration. farmers should be taken
into confidence through various media and must be convinced that though
diesel subsidies are to be lifted they will keep on getting subsidized
electricity for their irrigation. If this requires use of nuclear power
govt may go for it.
The congestion on the Indian roads is due to too many cars on the road. The slow moving
traffic also means more fuel consumed for every kilometer driven in other words fuel
economy is poor. The only way to reduce fuel consumption is to increase the costs of cars
to exorbitant prices so that people are forced to use public transport instead of driving to
work, restaurants etc. And a second option is to restrict the number of cars per family to
one as there will be rich people with or without black money who will be able to buy brand
new cars at even very high prices. If the above two are followed (not easy to adopt of
course) there is every likelihood the prices will fall and it is not necessary to subsidise the
fuel.
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