With losses on diesel sales mounting to over Rs 10 a litre, a worried government is learned to be finalising a two-pronged strategy to recover costs: a marginal increase in diesel prices, and a tax on diesel cars to recover the remainder of the deficit.
Sources revealed that under consideration is a proposal to increase diesel prices by around Rs 2-3 a litre, and to simultaneously levy an annual road tax on the sales of diesel cars that would recover part of the remaining losses of Rs 7-8 a litre.
However, officials agreed that the quantum of diesel price hike is crucial as it has a cascading effect on all essential commodities, adding to inflation. Diesel is used as an input in several sectors, so an increase in its prices pushes up inflation.
Diesel has a weightage of 4.67 in the wholesale price index (WPI) — the highest among the 670 commodities on the WPI. For every rupee that diesel price rises, the WPI is estimated to increase by 0.13%. So raising diesel price is a ticklish decision that has to be balanced against the interests of industry and consumers and the inflationary impact of high global oil prices.
The retail price of diesel was last increased by Rs 3 a litre on June 25, 2011.
The recommendation of levying an annual road tax on diesel cars is in line with the suggestion by energy expert Kirit Parikh, who has proposed part recovery of the Rs 10 a litre loss on diesel from users of diesel passenger cars by reintroducing the annual road tax that was prevalent till a few years ago and which is still common in many countries.
Parikh had proposed that a differential road tax be imposed on diesel vehicles to reduce the current distortion in purchase of diesel and petrol vehicles. At present, diesel is priced at Rs 40.9 a litre in Delhi, compared to petrol’s Rs 67.78 a litre. Due to the huge price difference, consumers have shown a marked preference for diesel-driven cars, whose sales have shot up.
The domestic sales of diesel cars has grown more than petrol for the first time in 14 years. In May, 85% of passenger vehicles that were sold were diesel-driven — a dramatic shift from the more or less 50% till recent past.
In 2011-12, the consumption of diesel grew 7.5% over the previous year.