Govt to feel pinch of consumer preference for diesel-run cars

Govt to feel pinch of consumer preference for diesel-run cars
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First Published: Thu, Feb 22 2007. 01 40 AM IST
Updated: Thu, Feb 22 2007. 01 40 AM IST
New Delhi: While new-age diesel vehicles may be more fuel-efficient and environment-friendly, their new-found consumer patronage is unlikely to be popular with the government. As petrol is taxed much higher than diesel, the government will lose potential tax income with every new diesel car sold. And raising taxes on diesel is not a real option as diesel prices are a highly politically sensitive issue.
As petrol is taxed at Rs23.65 per litre and diesel at Rs10.5 per litre, the government makes an average opportunity loss of Rs15,250 an year on each diesel passenger car assuming they travel 12,000km during the same time period. This is the incremental amount of tax that it would have earned had the vehicle run on petrol.
A projected 2.1 million diesel-powered cars and multi-utility vehicles will be added to the roads by 2010, taking their total to 5.9 million. According to consulting firm AT Kearney, car-owners on an average run their vehicles 12,000km every year. This translates into a consumption of 800 litres of diesel or 1,000 litres of petrol a year per car, assuming an average mileage of 15 and 12kms per litre respectively.
By 2010, then, the opportunity loss arising from diesel vehicles will be Rs8,986 crore, up from the current opportunity loss of Rs5,795 crore on 3.8 million vehicles.
Some amount of this would be made up by the incremental excise the government earns on cars—diesel cars cost more to make than petrol ones and are priced higher.
In a market obsessed with cheaper rides, sales of diesel-powered vehicles is projected to be 35% of a 2.2-million a year passenger vehicle market in 2010 against 30% now, according to estimates by marketing information firm JD Power & Associates.
A.V. Srinivas, a 26-year-old executive with Reliance Retail, is deferring his car purchase for two months till a suitable diesel model hits the market. “Diesel is cheaper and the new engines are more fuel efficient,” he says. “The impact on my pocket will also be lighter by Rs1,500 a month.”
Indian car makers are spending over $1.5 billion (Rs6,750 crore) in building factories that make diesel engines to tap this growing demand. They plan to make diesel engines which are more energy-efficient, and with lower emissions compared to petrol engines of the same capacity. These engines will also be cheaper, as the engines incorporating this new technology will be made locally.
“Ultimately, in the long run, it could hit consumers in the form of higher taxes,’’ said D.K. Joshi, principal economist with credit rating agency Crisil.
Diesel prices are currently around 70% of petrol prices, and are expected to remain at these levels due to political pressure, say members of government. “Diesel is used essentially in freight and passenger transport vehicles,” says Nilotpal Basu, a Communist Party of India (Marxist) leader and former member of the Rajya Sabha. “Any increase in its price will hit the common man’s pocket directly.”
Maruti Udyog Ltd is making 100,000 diesel engines a year at its Manesar plant. The company is now planning to treble the capacity.
“The price of diesel is one of the key factors driving demand,” said Jagdish Khattar, managing director of Maruti Udyog Ltd, at the launch of a diesel version of its compact car model Swift, in December.
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First Published: Thu, Feb 22 2007. 01 40 AM IST
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