Macro Matters

Blame government for growth of diesel vehicles

Tax reforms are needed to bring parity in diesel and petrol prices.

 |  Macro Matters  |  4-minute read |   11-12-2015
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On Friday, December 11, the National Green Tribunal (NGT) asked the Delhi government to stop registration of new diesel cars in the city-state. While it is a welcome move to lower purchases of diesel vehicles by residents of Delhi, there could be a spurt in registration of such vehicles in the satellite cities such as Gurgaon, Noida and Ghaziabad by Delhiites.

For the move to have some impact, registration needs to be suspended in these places too, but it will not be an easy measure to implement.

Other than private users, diesel vehicles are part of Union and state governments' fleet of transport - most official cars used by ministers and bureaucrats run on diesel.

The NGT wants both the Union and state governments to stop purchasing diesel vehicles. However, it has not barred the governments from hiring diesel vehicles, which is now a common practice in government departments.

Diesel is also the choice of fuel for the large fleet of cars, multi-utility vehicles and sports utility vehicles used as cabs to ferry people from Delhi to their offices in Gurgaon and Noida.

Given Delhi's dependence on such transportation, ridding the state of diesel vehicles will take a long, long time, even if the ban on new registration of diesel vehicles is accompanied by mandatory scrapping of older vehicles. In any case, the scrapping policy is on hold at the moment.

Diesel grew to be the preferred choice of fuel only when it became far cheaper than petrol, making running diesel vehicles more economical for people who needed to commute over 40 kilometres a day. The price difference between the two fuels began widening when the increase in crude oil prices were passed on to petrol users but held back or only partly passed on to diesel users.

The gap started widening rapidly from 2011. On July 1, 2011, the difference in the price of the two fuel was Rs 22.41 a litre in Delhi and by end-May 2014, the difference had peaked to Rs 32.27 a litre.

Petrol was nearly 80 per cent more expensive than diesel at that point. For the first time ever, diesel cars sales outpaced petrol ones.

What looked like the UPA government's reluctance to increase the price of diesel, due to political fallout, encouraged automobile companies to step up the manufacture of diesel cars and also announce new investments in diesel vehicle plants.

Honda Motors, for instance, decided to launch its first diesel car in India as it was rapidly losing market share to rivals who had diesel variants on offer.

Increasing price of diesel was seen to be difficult as a large volume of it was used by farmers to pump up ground water and by commercial vehicle transporters such as passenger buses and trucks. Truckers are a strong lobby and they have generally opposed increases in the fuel price.

It was also feared that an increase in transportation costs would raise the cost of vegetables and fruits, pushing the already high inflation higher.

However, as subsidy on diesel became unsustainable, the UPA government decided to increase retail price of diesel by 50 paise a month. Over a period of time, such increase helped lower demand for diesel vehicles.

Now, retail prices of both diesel and petrol are deregulated - meaning prices change with movement in their international prices. Yet, petrol is about Rs 14 more expensive (about 30 per cent) than diesel, although, in the international market, diesel tends to be a little more expensive than petrol.

All this difference is due to higher taxes on petrol. In Delhi, for instance, consumers pay nearly Rs 32 as union excise duty and state value added tax on a litre of petrol compared to just about Rs 18 on diesel.

To make diesel less attractive, both central and state governments would need to do their bit to bring parity in prices of the two fuels. It cannot happen overnight. The adjustments will have to be made the same way diesel subsidy was reduced - about 50 paise a month.

It would require some downward revision in taxes on petrol and some upward revision in taxes on diesel. Lowering taxes on petrol will not hurt any government, as sales of diesel is about 3-4 times that of petrol.


Tina Edwin Tina Edwin @tinaedwin

The writer is a Delhi-based journalist.

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