The proposed diesel tax levy has come back to haunt the automobile industry.
Indications are that the Government is likely to go ahead despite stiff protests from carmakers. From their point of view, the better option is to increase diesel prices, except that this is not going to happen in a hurry. People are still smarting over the recent petrol price hike and any move to follow suit with diesel will be the last straw.
The levy on diesel cars was expected to be announced in this year's Budget and the auto industry was pleasantly surprised when it did not happen. The Government also made it known that it was going to ‘bite the bullet' on subsidies which clearly conveyed that the era of cheap fuel pricing was coming to an end.
No consistency!
However, with the Petroleum Minister now reiterating that diesel prices will not be increased, the only way out is to discourage its use in cars. Will this work? Nobody really has a clue except that the think-tank in New Delhi believes it is the best way out of a severe crisis where fuel subsidies are hurting the economy badly. It is this dilly-dallying on policy issues that is raising the hackles of the auto sector.
“There is just no consistency from the Government's end and it is getting increasingly difficult for us to plans our investments in India,” an exasperated CEO told me recently. His point was simple: either you levy a cess on diesel cars or increase the fuel price, but don't procrastinate!
It is also no secret that these delays are a result of extensive lobbying by companies, ministries and industry associations. In the process, it only creates more chaos within the auto sector at a time when a long-term stable policy is the need of the hour.
Far too often, carmakers have been caught unawares on abrupt policy changes which have wreaked havoc with their product plans.
The small-car push
For instance, when the Government decided that small cars would be levied a lower excise duty of 16 per cent, it left manufacturers of large cars unhappy since they had to cough up a heftier 24 per cent.
Most of them realised that they had no option but to join the small-car parade. This meant complying with the 4-m-length rule and capping engine capacities at 1.2 litres for petrol and 1.5 litres in the case of diesel cars.
Industry veterans believe that it was this abrupt change in duty structures that derailed Mahindra-Renault's Logan which was launched with much fanfare. The Logan was the best bet as an entry-level sedan but suffered because of the differential excise duty, veterans say. As the rechristened Verito in the custody of M&M, the sub-4-m avatar may just do the trick when it is launched during the course of this fiscal.
Today, the excise duty for small cars is 12 per cent and twice as much for others which are over four m long. Those cars with engine capacities of over 1.5 litres are levied 27 per cent duty.
It will be interesting to see how the Government works out the diesel levy in this maze. During the fuel crisis of 2008-09, the focus was on large gas guzzlers which were slapped with Rs 15,000-20,000 additional levy. Today, diesel compacts are being lapped up furiously with the result that old petrol-driven favourites such as Alto are losing out rapidly to siblings such as Swift. It is only fair that any move to tax diesel cars includes the entire range on offer in the market.
Recast excise
Perhaps, one option that can be explored is to recast the excise duty structure where the 12 per cent continues on small petrol cars while diesel will be levied a higher 16 per cent. For larger cars, the Government could reduce the duty on petrol versions to 20 per cent while the 24 per cent is confined to diesel.
Alternatively, large petrol cars can be levied 24 per cent and diesels 27 per cent.
It is imperative, though, that there is no change in this duty structure unless the impossible happens and diesel prices end up being nearly on par with petrol as is the case in the West. At present, the difference is a hefty Rs 30 a litre and the gap can only be bridged once a differential pricing system is in place for diesel in the auto sector.
Ideally, cars should pay the market price for the fuel while the subsidy will extend to trucks, buses and the agriculture sector. When this happens, there will be no reason to continue with a two-tier excise-duty structure for petrol and diesel cars.
In fact, this was the case till the early 1990s when diesel-driven multi-utility vehicles got away by paying a mere 15 per cent duty while petrol versions such as Maruti Gypsy coughed up nearly three times as much.
There is no reason for the Government to revisit this phase which was marked by arbitrary policies and favouritism. The automobile industry has come a long way since then, with both Indian and multinational companies pulling out all stops in a competitive market.
The Government should involve them more proactively on a host of issues, and the way forward should see a strong partnership forged between the two.
It is also time to acknowledge that the days of cheap fuel are a thing of the past. Crude oil prices may have softened in recent days, but it is only a matter of time before they bounce back to the levels of over $100 a barrel.
Car users need to understand that they are paying for a precious commodity, be it petrol or diesel, which cannot be subsidised forever.
This is a better option than unavailability of these auto fuels which can have catastrophic consequences as seen in Chennai recently. Spare a thought for the oil companies which have to ensure fuel supplies across the country even while their losses are piling up by the hour.
Others must share the pain in these difficult times, especially when they can afford to.