Subsidizing Diesel - one solutin

The auto industry in India has been facing quite a few headwinds in the form of higher interest rates, fuel prices and fall in demand. Thus, most companies have seen volume growth slowdown in the past several months. The silver lining in the cloud has been the furious demand for diesel vehicles, which has lent some form of a cushion to the companies. As petrol prices have been freed, the recent hikes had led to an increasing gap between the prices of the fuel and diesel. This saw car buyers make a beeline for diesel cars. Diesel vehicles accounted for 40% of car sales in FY12, twice their share in the previous year.

Now that the diesel price has also been hiked, is the car industry worried? Not really. In fact, the industry has heaved a sigh of relief. This is because the government earlier was contemplating taxing diesel cars, a proposition that the industry was totally against. Thus, as far as auto companies are concerned, this is the lesser of the two evils. Also, even though diesel prices have been hiked, there is still substantial difference between the prices of the two fuels. This means that there will not be much of an adverse impact on the demand side unless the gap narrows considerably sometime in the future.

The only solution as I see it is to have a differential pricing system for Diesel used for private cars and that used for commercial vehicles used for public purposes.

We are already having this differential pricing system for LPG cylinders.Commercially used LPG cylinders are available at around Rs 1400.00 whiles the domestically used ones cost about Rs 400.00 and the government is proposing to increase the price of these to around Rs 750/-.

But first of all, is the price increase necessary?

Over 60% of the cost is because of different taxes and duties imposed on these items from the time they are imported to the time they reach your house.

Besides excise duty, sales tax, service tax, customs duty, addl customs duty, cess, Edu cess, income tax, dividend tax and a myriad of other taxes we are asked to pay as they are charged on the companies, importers, transporters.

Of course, there is the inefficiency tax which we pay for wrong decisions or delayed decisions of the company and the government, like a ship coming to the port and lying there for days on end as the cargo cannot be unloaded.

Taxing Diesel cars is not a solution.

It gives the government windfall gains which it eats up in its corrupt ways.

Having a differential pricing system is much better.

Each diesel using vehicle should be given a unique number, according to its category.

All Diesel/Petrol pumps should be asked to keep computerized records which should be connected through net with central marketing who would keep a record of the lifting of diesel by each type of vehicle with kilometers covered to check there is no leakage by selling the diesel to unauthorized vehicles.

I know setting up this infrastructure would be expensive but it would be worth it. This would be a one time expense unlike the subsidy which the government claims is a perpetual drain. Of course, I don't believe them.

Diesel would be available to the required group cheap and would be expensive for private cars who are jumping on the bandwagon.

I know that car companies would not like it but they have to swallow it.