Dr Ashwani Mahajan
In the last two decades, demand for diesel cars is on rise. Main reason for this trend has been the low price of diesel vis-a-vis petrol. Another advantage of diesel is that it gives more millage in comparison with petrol. Due to low operating cost of diesel cars, automobile companies have been charging higher price for diesel cars. In order to discourage the use of diesel cars, which cause more pollution, Government has also been imposing higher rate of taxes on diesel cars. Despite high ‘on road price’ of diesel cars, demand for diesel cars especially luxury cars, has been increasing primarily due to low running cost of these cars.
In the past prices of petro-products used to be administered by the Central Government. Since most of the oil companies were under public sector, it was easier for the Government to take decisions to alter petro prices simply at a stroke of the pen. These oil companies have also been making huge profit. If due to low price of some petro-products, say diesel or gas (due to Government policy) they were incurring losses; they were more than compensated from other products, which were high priced. However in the last few years, these companies have been complaining that they are incurring losses and demanded subsidies to compensate for low price of diesel, kerosene, LPG etc.
Decontrol of Petro Prices
Since June, 2011, petro prices were decontrolled in principal; and pricing of petrol, Kerosene, diesel and LPG come under the oil companies. However, if the government wanted these prices to be less, then oil companies would be compensated accordingly. For instance, if diesel or LPG price is kept low, oil companies would get compensation in the form of subsidies. Faced with huge fiscal deficit, Government has been trying to reduce subsidies on low priced petro products. It is notable that petroleum subsidy bill of the central government was rupees 85,430 crore in 2013-14, which has been kept at rupees 63,427 crore in the budget for fiscal year 2014-15.
Generally it is believed that petrol is used in private vehicles including cars, and therefore high price can be changed on petrol. However, diesel is used for public transport (buses, trucks and train) and agriculture; and therefore by keeping the price of diesel low, we can keep the transport cost and cost of agriculture low. Similarly price of LPG and Kerosene are also kept low to give relief to commoners.
In the past Central Government had been trying to keep the price of diesel low (both before and after decontrol), with an objective to keep the transport cost low. However, subsidy on diesel has been misused, as people have started using diesel luxury cars. It is obvious that those who can purchase high priced luxury cars can also pay high price for diesel. However, it is not practical to change high price separately for diesel used in luxury cars.
Arguments against Subsidy
Many economists do not approve the policy of granting subsidies. Their argument is that while giving subsidy, the price of the commodity is reduced artificially, and therefore its consumption would increase. Those commodities on which subsidies are being given are actually scarce commodities, as much valuable foreign exchange is used to import petro products. Increasing consumption of these commodities may not be in the best interest of the nation at large. Not only that subsidy burden is rising, even foreign exchange outgo too is on rise. It is notable that in most other countries, where no subsidy is given to diesel, price of diesel is about 10 percent higher.
To reduce the burden of petroleum subsidy, UPA Government decided to effectively decontrol diesel price also from January 17, 2013. Since then diesel price has been hiked in 19 installments, between 40 and 50 paisa per liter and total increase in price of diesel was 11.81 rupees since then. Recently government has finally decontrolled diesel prices, however due to decline in international crude prices, diesel price has been reduced by rupees 4.34 per liter. As on date, price of diesel is rupees 50.51 per liter, while price of petrol rupees 61.33 per liter in Delhi. It may be known that, due to variation in local taxes, prices of petrol and diesel differ in different states.
Today diesel price is 82.4 percent of price of petrol, whereas it was 68.9 percent of petrol price in 2008. Thus we can say that diesel has become relatively less attractive and now as a fuel.
Economics of Diesel Cars
After January 2013, when the government decided to gradually raise diesel prices, operation of diesel cars is becoming costlier. Whereas, operating cost of diesel luxury cars, which was rupees 2 to 3 per kilometer, now is reaching rupees 3 to 4 per kilometer. With increase in operational cost, already costlier diesel cars due to high ex-factory price and higher taxes, diesel cars as an option is becoming less attractive. This is also a fact that maintenance cost of diesel cars in also higher than petrol cars and they also depreciate faster as compared to petrol cars. Thus one can conclude that diesel cars are no longer economical as compared to petrol cars.
Recently Supreme Court of India has also expressed concerns about rising vehicular pollution in Delhi and has called for initiating steps to reduce the same.
We can understand that in the times to come, demand for luxury diesel cars and even diesel taxies may go down. Whereas due to easy availability of Compressed Natural Gas (CNG) in Delhi and other metros, there are hardly many diesel taxies left. However, some taxies coming to Delhi and other metros are still operating on diesel. Thus under these circumstances, when diesel vehicles are becoming less attracting, in future environmental pollution may also go down. Though, the objectives behind new diesel price policy of the Government is not to check environmental pollution, however, as a ‘side effect’ we can hope for improving quality of air in metro cities, thanks to the pruning of diesel subsidy.
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