Mr. Reddy, please check your diesel math!

Siddharth Tak and Rohit Joshi / Zee Research Group

New Delhi: India’s petroleum minister Jaipal Reddy has proposed to levy additional excise duty on diesel cars to resist advent of diesel economy in the country. While the idea behind the levy may be right, the key question that begs an answer is whether or not the excess quotient was the solution. The minister perhaps has not done his home work well.

Consider the following facts:

1. Passenger cars are not the main drivers of the diesel economy hence subjecting them to excess levy would not really help curtail the growth of diesel economy.

According to official data furnished by the finance ministry, the passenger cars including SUVs accounted for just about 15 per cent of the diesel consumption. This is not insignificant but does not merit being the sole argument for excess levy to halt diesel economy growth in the country.

Taxing such a small percent appears to be a short term solution for the government, which is currently grappling under ballooning current account deficit. Said, Abdul Majeed, head, auto practice at PwC, “The proposal made by oil minister is totally rubbish. It is not a long term solution.”

Oil minister has proposed to levy additional excise duty of Rs 1.70 lakh on small diesel cars, and Rs 2.55 lakh on medium and larger versions. This, the ministry argues, would arrest the sales of diesel vehicles in the country.

The truth is that the quantum of additional levy (up to Rs 2.55 lakh) is almost two to three times more than Rs. 80,000, which was earlier recommended by Kirit Parikh Committee. Deepak Jain, Assistant vice president at Sharekhan, asserted, “Imposing any additional tax on diesel cars would drastically affect the auto industry, and might force Indian as well as foreign companies like Maruti, Mahindra & Mahindra, Ford, General Motors to postpone their investment plans.“

2. Differential fuel pricing norm would be addressed by levying the excise duty.

It is true that helped by the prevailing fuel price differential the share of diesel cars in the overall passenger vehicle sales have zoomed over 44 per cent in May this year, up from 32 per cent in the same month last year. But can one distortion be killed by creating another distortion.

Reacting to the proposal of special excise duty, Sugato Sen, Senior Director at SIAM, said, “Countering the effect of one distortion (in fuel pricing) by creating another distortion (higher Excise Duties on diesel cars) is neither good economics nor good politics.” “The 75 per cent price differential between petrol and diesel is unsustainable, and this kind of differential doesn’t exist anywhere in the world, “added Sugato.

3. Setting diesel economy right is the top most priority. Industry concerns are not the top priority.

The UPA government flip flop on diesel is bound to lead to total confusion in the industry in terms of capacity build up and execution of future projects. The main concern which has emerged since the month of May this year is related to stock pileup of diesel Vehicles. The inventory of unsold diesel vehicles has more than doubled to 107,818 units, compared with 52,250 in the same month a year ago.

This rise in inventory has come at a time when the government is considering imposing additional levies on diesel vehicles. As per industry estimates, diesel penetration is still lower in India (around 40 per cent) in comparison to developed economy like Europe (around 75 per cent) and in order to exploit the opportunity of dieselisation, leading automobile makers have increased production capacity of diesel vehicles up by 35 per cent to 11.61 lakhs units in last one year (2011 -12) when compared to 2010 -11.

Road Ahead

The industry is pushing for a clear cut policy to enable companies to stay course. Sugato of SIAM proposed an alternative and said, “Huge distortion (fuel pricing) needs to get rectified, and diesel price should be increased in a calibrated manner so that the government and oil companies don’t bleed.”

Deepak at Sharekhan, said, “The midway route might be opted where government may increase diesel price say by Rs 2 to 3 per litre along with imposition of partial additional duty of worth Rs 30,000 to Rs 40,000, which is half of what Kirit Parikh Committee has recommended.” But nothing short of deregulation would please Majeed at PwC. His wish may come true as diesel decontrol report is expected to get finalised this week by chief economic advisor Kaushik Basu.