External Combustion

Battle Stations Over Diesel

• Government wants to reduce high demand for diesel cars, driven by 40% cheaper diesel, fuel-efficient engines.
• Options include an additional 10% tax on diesel cars in Budget 2012. Diesel guzzler SUVs can also attract tax.
• Annual tax, fitness certificate for diesel vehicles also being considered
• Industry divided, lobbying under way
• Tata Motors, Mahindra to lose if tax is imposed. But petrol giants Maruti, Hyundai are losing marketshare.

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The UPA will take a stand in Budget 2012, two months down the line. As things stand, the government is seeking to make diesel vehicles more expensive—an additional 10 per cent excise tax on diesel cars is the most likely option. Another proposal doing the rounds is a return to annual road tax payments (abandoned in the 1980s) for all car owners, with a differential tax for diesel vehicles. Sources say a decision is imminent.

Petrol car manufacturers have been trying to bring about parity in petrol and diesel prices for several years. For now it seems the petrol lobby—with leading manufacturers like Maruti Suzuki and Hyundai Motors—is closer to achieving its objective. But don’t rule out the powerful diesel lobby which has industry stalwarts like Tata Motors and Mahindra. Recently, heavy industries minister Praful Patel spoke in their support. The Society of Indian Automobile Manufacturers (SIAM), an industry body, has also been opposing any government move to tax diesel cars.

The government has a straightforward logic for proposing an additional tax on diesel vehicles. It feels that there is no justification for people owning expensive diesel cars and SUVs (sports utility vehicles) to drive on subsidised diesel while small car owners continue to drive on expensive petrol. Says R.C. Bhargava, chairman, Maruti Suzuki, a majority of whose cars run on petrol: “The logic of the levy is whether one of the fuels should be subsidised over the other. We are not favouring any side but the policy will make a big impact on how people decide while buying a car.”

Of course, this will also affect diesel car manufacturers, many of whom are actively planning to set up diesel engine plants in India. Bhargava’s former colleague at Maruti, Jagdish Khattar, now the MD of Carnation Auto, is upfront. “I am a great believer that the existing policy is skewed towards diesel. The diesel option is not there in very small and largest selling cars. Why should two-wheeler and small car owners pay close to Rs 70 per litre of fuel when large, expensive car owners pay much less? This is not an aam aadmi policy.”

In the past few months, sales of diesel vehicles have overtaken that of petrol cars by several notches. In fact, petrol cars have seen sales decline by 16 per cent after April 2011, while there is a waiting period (between 4 and 10 months) for diesel vehicles. Even the higher cost of diesel cars (Rs 75,000 to Rs 1 lakh more than their petrol counterparts) hasn’t dented demand. Diesel cars’ share of the overall sales pie has gradually been increasing, from 28.4 per cent of sales in 2010-11 to 32.4 per cent during April-October 2011.

The impending government move also comes at a time when the petrol-diesel price disparity is at a historical high and stands at Rs 25-27 per litre (around 40 per cent). Petrol prices have risen thrice in the past eight months. Diesel prices, on the other hand, have remained unchanged as the government has not allowed any increase, and continues to subsidise it as the poor man’s fuel.

From left, Hyundai’s Arvind Saxena, Maruti’s R.C. Bhargava; and Ratan Tata and Anand Mahindra

Interestingly, the committee had said that personal cars accounted for about 15 per cent of the total diesel consumed in the country, while the Planning Commission puts the figure around 0.6 per cent. Parikh has recently said that he was relooking at his numbers. SIAM puts diesel consumption by private passenger vehicles at 1.03 per cent and that of utility vehicles at 0.53 per cent. That’s a small number—and thus an easy target.

As expected, SIAM is agitated and feels any move to tax diesel cars would be extremely retrogressive for the industry. Vishnu Mathur, director general, SIAM, says: “We are not in favour of putting taxes based on technology. This is potentially dangerous as there are other fuels.” So the government may have to formulate policies for individual fuels like CNG and LPG. Mathur also says that since diesel engines are now 20-25 per cent more fuel-efficient than petrol ones, it would set a wrong precedent for newer technologies.

The MNC car manufacturers, many of whom are increasing their diesel offerings, are obviously unhappy and feel that this would hamper the industry’s prospects. Says P. Balendran, VP, General Motors: “As of today, we do not have a firm fuel policy. The industry is passing through a difficult time and any levy on diesel will hamper its prospects as we expect the shift to diesel cars to continue even if diesel is deregulated.”

The call for clarity on a fuel policy has been echoed by all in the industry as many companies are waiting to invest in the lucrative diesel sector. Arvind Saxena, director, marketing and sales, Hyundai Motor India, says, “Without clarity, it is difficult for us to make any investment decisions in a diesel plant.”

While an announcement is certain in Budget 2012, it will be difficult for the government to fully alienate powerful diesel manufacturers. It might even choose a midway path by increasing taxes on the more expensive SUVs and taking “a step forward” to bring in price parity.