It is barely 10 days since the Budget was presented and two significant announcements have already been made. The first was by the Petroleum Minister, Mr Jaipal Reddy, who ruled out any possibilities of diesel price deregulation. The second was by Maruti Suzuki, traditionally a petrol maker, which made known its intent to invest Rs 1,700 crore in a diesel engine plant.

What does this add up to? The queue for diesel cars is just going to get longer so long as petrol continues to be dearer. The price difference between the two fuels is already Rs 25/litre, which will only increase to Rs 30 once petrol prices are hiked in the coming days. Demand for petrol cars is already on the wane and this will be down to a trickle eventually.

Options for Govt

Diesel will emerge the winner in this uneven tug-of-war though the same cannot be said for its retailers — IndianOil, Bharat Petroleum Corporation and Hindustan Petroleum Corporation — which are losing over Rs 13/litre on the fuel.

It already accounts for over 50 per cent of their projected losses of Rs 1,40,000 crore this fiscal, with cooking gas and kerosene taking up the balance. This figure is expected to balloon further to over Rs 2,00,000 crore in 2012-13 and diesel will continue to burn a hole in their pockets.

In this grim background, the Government just cannot afford to leave diesel prices untouched.

The auto industry heaved a huge sigh of relief when the Budget steered clear of imposing any levy on diesel cars but the subject could just be revisited in the near future if there is no fuel price hike and crude continues its upward spiral.

The other option for the Government is to reduce excise duty on compact petrol cars, which are now on a par with their diesel counterparts at 12 per cent. Bringing the level down to 8-10 per cent will make them attractive to customers and offset the comparatively higher fuel price in the process. If petrol continues to be nearly 60 per cent dearer than diesel, there is no reason why cars powered by the fuel should not be cheaper.

In the not-so-distant past, Budgets have reduced excise duty on cars with the explanation that higher sales will offset fears of losing potential revenue. The same principle could apply for petrol cars unless, of course, the Government chooses to levy a higher structure of 14-16 per cent for all diesel cars. This will make up for the cheaper price of fuel customers will end up paying during the lifetime of the vehicle.

Automakers have never been happy with excise duty classifications which seem to confer undue benefits on some user segments. Years ago, diesel-driven utility vehicles paid lower duties which raised the hackles of manufacturers who only had petrol versions to offer.

More recently, the move to extend concessions to small cars (less than four metres long with engine capacities capped at 1.2 litres for petrol and 1.5 for diesel) did not go down too well with makers of larger vehicles.

The time has now come to throw a lifeline to compact petrol cars which are rapidly being sidelined in a diesel-dominated market.

Tackling diesel subsidy

By the end of the day, these remain interim solutions when the real challenge on hand is tackling the issue of diesel subsidy. There are no two ways about the fact that car buyers should pay the market price for diesel which would work out to nearly Rs 60/litre, bringing it closer to the price of petrol.

In the process, the scramble for diesel cars will be kept in check, which will result in lower consumption and keep the oil companies in a happier state of mind.

Knocking off sales tax on petrol and diesel (which accounts for a sizable chunk) could also help pave the way for a deregulated pricing regime except that the States will not hear of any such move. Revenue from petro-products is critical to their fiscal planning.

Hence, even while their governments oppose fuel price hikes, individual States will fiercely guard their levies on petrol and diesel. This explains why Indian customers continue to pay the moon for these auto fuels, which makes a mockery of the subsidy definition.

The Government has also faced relatively lower political opposition raising petrol prices as it is still perceived as a rich man's fuel. In the process, it has become dearer by nearly Rs 25/litre since the time it was deemed a deregulated fuel in June 2010.

However, the going is not as easy for diesel, whose uses go beyond cars to the truck and farm sectors. Any price hike in diesel only stokes inflation which is already hurting households and this explains why the Government is in such a dilemma. In the process, the buying frenzy for cars will continue unabated.

It is quite common to see families own two vehicles and making the most of subsidised fuel. These are the same people who will happily cough up pots of money at multiplexes or fancy restaurants but will protest loudly if petrol or diesel prices are hiked.

It is high time that we got used to the fact that these are precious fuels which will become increasingly scarce over the next few decades.

Public transport systems

The time has also come for States to pay serious attention to improving public transport systems. This has been one of the major reasons for the proliferation of two-wheelers and cars.

It is not as if people enjoy driving in cities like Mumbai; they prefer this option to travelling in overcrowded trains and buses. Initiatives such as the metro in Delhi and Bangalore will go a long way in curbing the use of personal vehicles and contributing to better fuel conservation.

Related Topics