On the face of it, petroleum minister S Jaipal Reddy’s proposal earlier this month to the finance minister to impose additional excise duty up to of Rs 2,55,000 on cars running on diesel to cut down on fuel subsidies seems logical. Diesel is subsidised, unlike petrol which was de-controlled in 2011. The under-recovery (or nominal loss to the oil marketing companies which are then compensated by the government by way of subsidy) stands at Rs 10.20 per litre as on today. While it is difficult to hike the retail price of diesel because of various compulsions, the rich are taking advantage of the situation by increasingly going for diesel-run cars, especially the guzzlers like the SUVs and MUVs. Last quarter’s figures suggest that the sale of diesel-run cars outnumbered the petrol-run ones.

The petroleum ministry data shows that the subsidy bill for diesel stood at Rs 81,192 crore in 2011-12. Reddy has warned that this will go up to Rs 1,00,000 crore in 2012-13. Add to that the subsidy on LPG (Rs 29,997 crore in 2011-12) and kerosene (Rs 27,352 crore in 2011-12) and it is apparent that something needs to be done quickly. But a hike in price will be politically volatile, given the response to the petrol price hike. A hike in diesel will also add to the inflation as it is used largely by the truckers to transport goods. The logical step, therefore, would be to discourage diesel usage in private vehicles.

But will that be anything more than a tokenism, besides being harmful to the automobile industry? According to the industry, diesel-run cars (including taxis) consume only about 5 percent of the total diesel consumption in the country. The impact of additional excise duty will not be very significant on consumption of diesel. On the other hand, it will be a blow for the auto industries, which have come to rely more on diesel-run cars. With GDP growth and industrial output nose-diving, any step that will harm it even more will certainly not be good for the economy.

So what is the way out? Two things are worth considering. One is the pricing system, which is not based on the actual cost of importing crude, refining it and adding all other costs like transport, dealers’ commission etc to arrive at the total cost. It is based on ‘trade parity price’ which assumes that instead of crude oil our state-run oil companies are importing refined oil. This jacks up the price artificially and from that the under-recovery is calculated. That is why though under-recovery remains high, the oil companies show net profit. The obvious thing to do is to go back to the old pricing mechanism which is based on actual cost.

The second step could be to reduce high taxes – excise, VAT etc – which contribute significantly to the fuel cost (more than 15 percent in case of diesel and higher in case of petrol).