Is the hike in duties on diesel cars a right move?

Wed, 30 May Pre-Open

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Under-recoveries of India's oil companies are a heavy burden on the government. While the deregulation in petrol prices has helped matters (although to some extent), the fact of the matter is that under-recoveries remain in the region of about Rs 1.4 trillion. Debates of deregulating diesel prices and increasing the price of kerosene and cooking gas have been going on for a while now. But no action has been taken regarding the same.

Oil Minister S. Jaipal Reddy recently announced that the price of diesel, LPG and kerosene would remain untouched. He also added no date has been fixed for reviewing the prices of these three subsidised fuels. Instead, the Finance Ministry is taking a different approach - that of increasing the excise duty on diesel cars. The rationale for the same is to curb the demand for diesel and ergo, a lesser financial impact to the government.

Considering the widening gap between the price of the two fuels - diesel and petrol, the demand for vehicles running on the former has shot up tremendously (despite the acquisition cost being much higher) in recent times. Given that the under-recovery on one litre of diesel is about Rs 15.4 and that the demand for diesel has risen (about 15% of the diesel consumption is accounted for by personal cars and SUVs), some action in this regard is required.

But instead of taking a pricing action, which would impact the common 'as it is not so happy with the recent petrol price hike' man, the government seems to want to take a different approach to neutralise the impact. As per the Oil Ministry, the additional amount earned from the excise duty will make good for the losses retailers incur on the sale of diesel at the government-controlled rates.

Readers would do well to recollect that a hike in excise duty of diesel vehicles was high on the list of expectations from this year's budget. But instead the Finance Minster went ahead and increased excise duties across vehicles.

We see this move as one that is done to defer the much required diesel price hike. True, that in an inflationary environment, minor price hikes in a widely used fuel would spurt prices and impact the common man. But the fact remains that for a country with such a high subsidy burden, delaying the necessary required actions for curbing the same is not the right way to go.