Levy on diesel cars will not solve fuel pricing tangle

With a diesel price hike out of the question, the Petroleum Ministry has now shifted its attention to the automobile segment. The idea is to discourage demand for diesel cars by imposing an additional levy on them.

This is not the first time this has happened. In 2008-09, better remembered as the year when crude prices touched $147 per barrel, the Centre slapped an additional Rs 15,000- 20,000 on cars with engine capacities ranging from 1500cc to over 2000cc. Naturally, automakers protested but it was clear that the move was directed at large gas guzzlers, which were making the most of subsidised pricing in difficult times.

Will the Government target the same segment this time around too? If it does, it is not going to help suppress demand for diesel.

Diesel options galore

Today, there are more small cars on the road and almost every manufacturer has a diesel option to offer. Over the last few months, with petrol prices galloping away to over Rs 70 per litre (diesel is Rs 46/l), customers are making a furious beeline for diesel compacts.

The logical option is to extend the levy to small cars, too, which account for over 70 per cent of sales in the country. The downside is that it could severely affect demand at a time when steep interest rates are already dampening market sentiment.

Skewed policy

The auto sector, in its turn, believes that the Government would do well to hike diesel prices instead. “When carmakers have worked so hard to achieve cost-efficiencies, why should they bear the cross for a skewed pricing policy?” an industry veteran asked.

Excise structure

There are other issues to contend with from the viewpoint of the excise duty structure. Small cars are levied 10 per cent and these are categorised as vehicles up to four metres in length and with engine capacities capped at 1200cc for petrol and 1500cc for diesel. All other cars and SUVs pay a higher 22 per cent excise duty.

Will the Government have different additional levies for (diesel-driven) small and large cars? Going by the 2008-09 experience, it would not be surprising if this ends up being Rs 10,000 for the compact range and twice as much for all other cars. Would this, in turn, be fair to the automobile industry?

“Obviously not, but there is little we can do in the process,” an industry official said.

Differential pricing

Clearly, this is not a long-term solution for the fuel pricing dilemma that comes back to haunt the Government year after year. The best way forward is to have differential pricing for diesel supplied to cars and commercial vehicles except nobody has a clue on how to make this work. If past experience is anything to go by, this will only lead to mass-scale adulteration of fuels and corruption at the dealers' end.

There is really no way out for the automobile industry this time around either except that it will raise a lot of questions on consistency in policies. The other big risk will arise if demand for diesel cars continues unabated even after the levy. The Government will then have to get back to the drawing board all over again.

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