There is, however, one fatal flaw in the growth of the car-making business in India. It is being helped along by a government policy that subsidises diesel in an effort to cushion the economy from spikes in international crude oil prices. This has skewed car production towards diesel cars — even expensive ones. Diesel has become the favoured fuel of the 3.1 million cars that rolled off Indian production lines in 2011-12 and unless the government stops them running at below cost, its subsidy burden is unlikely to ease. Car owners, who account for 15% of the country’s diesel use, can afford to pay more for the fuel and, in fact, can even cough up more for an additional excise duty on the cars they buy. This has been a recurrent theme of experts brought in by the government to suggest ways to whittle down its fuel subsidy. The argument for freeing the price of diesel is supported by the expected impact on trucks, which burn 40% of all diesel. They can pass on higher fuel costs to shippers.
European carmakers with established advantage in diesel engine technology have forced the Japanese and the Americans to review their India launches. This despite the fact that a mid-sized sedan driven 1,000 km a month would need five years to recover the higher showroom price of the diesel variant. As the artificial gap with the price of petrol at the pump closing, the breakeven point among the competing fuels shifts outwards for a car owner. If the government rustles up the nerve to free diesel prices — direct cash transfers could embolden it — the car-making industry will twice be the recipient of unintended consequence. Cheap diesel helped it grow. A reversal of policy will hurt it when it needs help.