Dual pricing regime: welcome solution

Dual pricing of diesel is a good idea, although not a very good news for car makers.

It has double advantage: checking misutilisation of subsidy, while helping in bridling inflation. With subsidy bill reduced, fiscal deficit comes down, and it’s an added advantage.

If finance minister has his way, price of diesel used in passenger cars will go up by around Rs. 7 a liter that is now paid by government in form of subsidy. It will go and the car owners have to take the burden, while subsidised price for the fuel used for goods vehicles will continue.

Diesel is inflation-sensitive so long as it is a fuel for goods vehicles. Its price has cascading effect on the commodity price, and it is importnant to keep it stable. The stabilization exercise has cost the exchequer Rs. 122000 crore in the current year, which is around 12 percent of the budget size.

With the trend changing, diesel is no longer a poor man’s fuel. The gas guzzler SUV craze is gone and people across the globe now want a fuel efficient car, and diesel is preferred. While diesel is 45 perecent cheaper, the diesel engine is 30 percent more efficient than that of petrol. Catching up with the trend even luxury car makers have increased their assembly lines adding up to the stock of diesel engines.

The large price differential between the two auto fuels is the main reason for the spurt in diesel car sales in recent years, in India. While the government has decontrolled petrol prices, allowing oil companies to align retail rates with international prices, diesel is still a regulated commodity.

Now, around 35 percent of passenger cars in the country are diesel driven. They are the biggest consumer after trucks, and owners of these cars are not poor, hence don’t deserve subsidy. And since they never carry goods the price burden on them won’t stoke inflation. In fact it works the other way round. The car owners may consume less fuel due to its dearness resulting in further easing of price due to less demand.

By going for the duel price, the government can save an estimated 15 percent of the oil subsidy bill. And that much will be of a great help for Paranab Da, who has promised us to bring down the fiscal deficit from whopping 5.1 percent to 4.6 percent.

Although the move could prove dampener for the auto industry that is already suffering from the slump in sales on account of rise in interest rates and petrol prices, the major players are appear to have prepared to take it in their stride. Diesel was leading to the growth momentum; in a sluggish market, and any major increment in the fuel prices could slow this. But, there is no other go but to face the reality.

The stand taken by SIAM (Society of Indian Automobile Manufacturers) in this regard is positive and healthy. While welcoming the move, it said it had always advocated a market-link pricing for the automotive fuel and even it supports full market pricing of diesel.

Then there is other hitch; the challenge that would be posed by dishonesty. Officials in the finance deportment have already expressed concerns over a parallel economy that would create. “If a dual pricing structure is in place, people would come in tractors, fill up drums with diesel and then sell it to car owners at a premium, but below the market price for passenger cars,” said an official.

What is the solution to these sort of problems? Step up the vigil at the petrol bunks and punish the culprits. Most importantly, you be honest.