Gadkari’s diesel tax gaffe underscores need to focus on outcomes, not process

Diesel-powered passenger vehicles attract 28% GST and a 22% tax
Diesel-powered passenger vehicles attract 28% GST and a 22% tax


  • The need of the hour today is to develop a mobility ecosystem that is sustainable and in harmony with the environment

Minister for Road Transport and Highways Nitin Gadkari is undoubtedly a man in a hurry. His go-getter attitude has undoubtedly transformed highway construction in India. Under his remit, the pace of road construction in India has leapfrogged from around 3 km per day to around 37 km per day.

His impatience with the normal glacial pace of decision-making in government is well known. This is why he managed to push through the direct jump from BS-IV to BS-VI emissions norms, where lesser mortals might have quailed at the costs and difficulties involved. But Gadkari’s impatience – and insistence -- compelled both automobile manufacturers and petroleum refiners to work double-time to effect the transition in an unprecedentedly short time frame.

But sometimes, his tendency to shoot first and ask questions later can have unintended consequences. After he threatened automakers, at the 63rd Annual meeting of the Society of Indian Automobile Manufacturers no less, to impose a 10% additional tax on diesel vehicles, stocks of auto manufacturers and petroleum refiners went into a tailspin and created panic in the auto industry, forcing him to walk back the statement soon after on social media platform X.

Of course, the threat to increase taxes on diesel vehicles was not the only thing Gadkari said in his speech. He had earlier urged the industry to voluntarily reduce the production of diesel vehicles. “Diesel is a hazardous fuel, and India is a huge importer as well. Industry must Suo Motu reduce diesel engine production, lest the government is forced to increase the tax on diesel vehicles," the minister said, while urging auto makers to look at greener fuels like ethanol, as well as hydrogen fuel cell vehicles. Apparently, in a bid to drive home his seriousness, he then added that he planned to hand over a letter to the finance minister later the same day, asking for an additional 10% GST on diesel vehicles.

The reason for the panic in the stock markets was obvious. Any such additional tax, if implemented, would have created havoc for the automobile sector, as well as petroleum refiners in India. Diesel-powered passenger vehicles attract 28% GST and a 22% tax, making such vehicles the most heavily taxed in the automobile sector. Any further increase in taxes would have practically killed demand, rendering infructuous the tens of thousands of crores automakers have invested in converting to BS-VI engines, as well as the sums refiners have invested in manufacturing and marketing BS-VI compliant fuel, all of which went into effect only in 2020, less than three years ago.

Refiners will also be in a fix. Diesel is by far the most consumed refined petroleum product in India consumed 85.90 million tonnes of diesel in 2022-23, while petrol consumption was 34.98 million tonnes. Almost 70% of India’s transport sector runs on diesel, as does all tractors, harvesters and other agricultural machinery, as well as a bulk of the pump sets in the agriculture sector. Diesel is also a key ‘business continuity’ fuel, powering most of the capacity operated by the industry.

Clearly, any shift away from diesel cannot happen overnight. It will also need the availability of cost-effective alternatives which can be implemented at a mass scale. Unfortunately, such alternatives are not readily available at the moment.

But the industry was justified in being worried, since such drastic policy shifts have happened in the past as well. Witness the government’s massive push for electric vehicles. The Centre wants a full shift of three-wheelers, and scooters and motorcycles with engine capacities of less than 150cc to electric by 2023 and 2025, respectively. The plan is already underway to have larger vehicles such as trucks and buses run electricity, despite the lack of infrastructure.

In 1998, the Supreme Court had mandated converting Delhi’s public transport vehicles – three and four-wheelers as well as buses – to CNG. At that time, CNG was touted as a green fuel and the order was intended to bring down Delhi’s massive pollution levels. It did help for a while but Delhi is back to being one of the most polluted cities in the world.

The trouble with the order was not that it was not well intended or even wrong, but that it failed to look at the root causes of Delhi’s pollution. Vehicular emissions constituted only a part of the problem. Even here, the trouble was not with diesel technology as such but poorly maintained vehicles, overloading and adulteration of fuels and lubricants which led to higher particulate matter pollution. Diesel engines emit less CO2 and greenhouses gases but more particulate matter and NOX than petrol. It’s six of one and half a dozen of the other.

The problem is that our policymakers tend to focus on the process and not on outcomes. If the goal was to ensure lowered emissions, the response should have been to set emission targets and time-frames, and leave it to the industry and markets to determine the best way to achieve that. Hybrids could have offered an effective interim pathway but by using a tax policy that focused on fuel (diesel vs petrol) and engine capacity rather than ultimate outcomes, they fell by the wayside.

In fact, Prime Minister Narendra Modi, in his message to automakers at the same meeting where Gadkari spoke about the tax hike, offered the right way to approach the problem. "The need of the hour today is to develop a mobility ecosystem that is sustainable and in harmony with the environment. Environmentally-conscious and economically viable mobility is the future," he said, commending the industry for introducing a number of alternative technologies such as bio and flex-fuel vehicles, hybrid electric, electric and hydrogen.

That goal can be achieved only if the industry is given clear outcome targets and a reasonable time frame to find appropriate solutions and not by using policy as a blunt weapon to force the pace of change.

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