Car sales are dropping precipitously as high interest rates and fuel costs deter people from buying. The Society of Indian Automobile Manufacturers has sought a reduction in the excise duty on cars after sales slid 12.5% in December, the steepest fall after an 18.5% decline in August. The automobile industry sits at the very top of any economy’s manufacturing pyramid and distress in this industry is transmitted wide through its extensive linkages with everything from mines to consumer credit. When a $58 billion industry accustomed to growing at 17% a year, seeing exports rise 30% annually and employing 13 million people directly and indirectly seeks help from the government it must be heard. A government roadmap for the industry over 10 years had set a $145 billion revenue target by 2016. Obviously, we have quite a bit of distance to cover.

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.