The government is caught in a diesel conundrum which could have been avoided if it decontrolled the price of diesel or, as former Planning Commission member Kirit Parikh suggested, fixed a subsidy cap of Rs 9 per litre and then make the diesel price market-driven. This does sound a more logical proposal than all the others currently being floated around. There is also the fact that besides adding to the huge fiscal deficit, it is the taxpayer who subsidises the comparatively well-off diesel vehicle owners.
The government’s main objective is to cut down the subsidy on diesel, which is expected to touch Rs 1 lakh crore in 2012-13. It is reluctant to deregulate diesel prices as that would cause an uproar amongst the vocal middle-class users of diesel vehicles, the farmers who use diesel for their pumps, not to mention the fishing community who use it in their boats. Truck owners, too, threaten that this would push up the cost of transport and, consequently, the price of everything transported by trucks.
Diesel will remain the preferred fuel as long as the huge gap of Rs 25 between diesel and petrol prices exists. And while greenhouse gas emissions are lower in diesel cars, they emit far more nitrogen oxide than petrol vehicles and so are far more damaging to air quality. Diesel cars are also more expensive than petrol ones as their engines are more fuel-efficient and thus costlier. Because of cheap diesel prices, there is a distortion in the balance between petrol and diesel car sales. Automakers like Maruti and some Japanese giants had to start making diesel cars because of the demand for them driven by the price differential in the fuels.
Mr Parikh has also proposed an annual Rs 50,000 road tax instead of a one-time tax, with differential slabs of Rs 10,000-Rs 20,000 between petrol and diesel vehicles. Diesel SUVs, he suggests, should pay a higher tax, up to `50,000. His proposal is before the finance ministry, and it is hoped the ministry takes a decision quickly. It has been dilly-dallying for almost two years, and its subsidy bill is growing higher.
The green lobby has suggested an annual environment tax of between two and four per cent of the vehicle’s cost for petrol and diesel cars respectively. If this is done to reduce pollution, it is most unlikely to achieve its objective. It only means that once you have paid this tax, you can pollute merrily! It is doubtful if this will really cut down the use of diesel cars because the bottom line for diesel car owners will remain the price of diesel, which is Rs 25 less than petrol.