Survey calls for fixed diesel subsidy; car makers unimpressed

Once bitten, twice shy.

Car makers on Thursday shrugged off the suggestion, made in the 2011-12 Economic Survey, that the subsidy on diesel be fixed per litre and that perhaps this may mean no additional tax on diesel vehicles in the budget scheduled for Friday.

They said many suggestions of the survey do not get implemented and this suggestion too may fall by the wayside. Besides, they have been hearing about a major policy disincentive in the Union budget on the purchase of diesel vehicles, where the government may make diesel cars more expensive through specific levies, instead of listening to the industry’s plea of raising the prices of diesel fuel.

Sources in the auto industry say the government could impose either a specific levy on diesel cars or raise the excise levy on diesel cars: “We have heard that the government is contemplating anywhere between Rs 25,000-50,000 levy on the purchase of a diesel car. Otherwise, the excise duty on diesel cars (which is currently on a par with petrol vehicles at 10 percent) could be raised by 4 percent,” said a senior official of a leading car maker.

RC Bhargava, the Chairman of Maruti Suzuki India, was also wary of reading too much into the Economic Survey’s suggestion that the diesel subsidy be fixed. “Lets see what the budget brings. In the past, Economic Surveys have made suggestions on controlling subsidies but these never got implemented. Anyway, our investments in diesel technology would be finalised only after the budget”.

Car makers have been struggling to meet diesel demand in the last few months as petrol cars keep languishing at showrooms. The significant price differential between diesel and petrol has made diesel cars much more attractive. February saw overall car sales skyrocket on the back of apprehensions that they will get more expensive after the budget.

As of now, at least Rs 3,000-3,500 crore fresh investment from vehicle makers in putting up diesel engine and vehicle manufacturing plants is awaiting a clear policy direction from the government.

In the Economic Survey, the government has spoken of moving away from price controls. Petrol prices were decontrolled in June last year but diesel decontrol has not happened till now. “For diesel, where even the rudimentary first step for freeing prices has not yet occurred, a possible intermediate step is to fix a per litre subsidy from the government. In other words, for every litre of diesel sold by an oil-marketing company, the government will give a fixed subsidy of a certain number of rupees,” the survey said.

If this were to get implemented, consumers will be partly exposed to international price movements in diesel and, therefore, the craze for diesel cars may see some dampening.

An official from a leading car maker pointed out that this suggestion from the government was anyway hard to implement and would bring its own set of troubles from the farm sector and other diesel users.

Talk of a specific tax on diesel vehicles surfaced after a report by Kirit Parekh erroneously pegged the share of diesel vehicles in overall diesel consumption in India at 15 percent. It was later proved to be under 2 percent by the automobile industry. Parekh suggested a levy of Rs 80,000 per diesel car, saying the government should not be subsidising diesel used for private cars.