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A slick sleight of hand

india Updated: Sep 18, 2011 23:56 IST
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At the launch of new diesel engines for Toyota’s Etios and Liva cars on September 9, a company spokesman said that India’s auto companies had to either shift to diesel or perish. He said that the last petrol price hike of Rs5 on May 15 had been too much and that the ratio of diesel car sales, that had earlier been about 40%, had now gone up to 70%. Now another price hike has made the disparity between petrol and diesel prices even worse.

This disparity is pushing down the sales of the entire auto industry that, according to the Society of Indian Auto Manufacturers (Siam), now accounts for 12% of India’s GDP. There are long waiting periods for diesel-powered cars while petrol car sales are languishing. Larger hatchbacks, which usually offer diesel engines, are now outselling the small petrol hatchbacks. All the car makers except Honda now offer diesel mills even for their small cars.

A barrel of crude contains 158 litres that at $40 (R1,880) a barrel in 2004 would have cost Rs 11.90 a litre. It now costs about $115 or Rs33 a litre. The government hides the fact that the cascade impact of taxes more than doubles the retail prices of fuels. The actual cost of petrol after refining and transport in Delhi is almost the same. The retail prices contain customs duty, a hefty excise duty, state sales tax, educational cess, etc., accounting for over 55% of the price consumers pay. The taxes on diesel are lower but they, too, carry a big tax element. These taxes are also unjustly multiplied with every increase in crude prices because these are levied on an ‘ad valorem’ (percentage) basis and increase exponentially with every increase in the costs of crude. The central and state governments should secure the tax income with tax at a flat (specific) rate per kilolitre. Their revenues will continue to grow with the growth in fuel consumption without cascading on the consumer.

Petrol prices bear the burden of high taxes because India’s politicians and planners wrongly believe that hiking diesel prices will be inflationary. Few people realise that every Rs1 increase in diesel prices only affects freight transport costs by a minuscule 0.6 paise equivalent to a measly 6 paise on every R100 you spend on your purchases. The impact is more on bus and taxi fares. But even here the impact should be just 7 paise for every R1 increase in diesel prices.

The cost of diesel is estimated to be about 35% of the costs of running a truck or bus. India’s 5 million trucks and 2 million buses have to also pay for finance costs, depreciation, staff salaries, tyres, repairs, taxes, bribes, etc.

Transportation costs average just 5% of the cost of most goods. So the cost of diesel is about 35% of this 5%, making the cost of fuel just 1.75% of the cost of the goods you buy. In the case of buses or taxis, every Rs1 price increase will have a 35% impact. So even if the cost of diesel goes up by a whopping 10% from say Rs42 to Rs46 a litre, the impact will only be 35% of Rs4, that is, Rs1.40. The cost for a taxi doing 12 kms per litre will be only 12 paise per km. The impact on a bus doing 4 kms per litre will be about 35 paise per km.

The government has been evasive about revealing fuel consumption patterns. But available data suggests that more than 56% of diesel consumption is by the transport sector and it is estimated that less than 8% goes for tractors and diesel pump sets. The total cost of this diesel is less than 0.5% of the value of India’s farm output. So the impact on poor farmers is minuscule.

This skewed government policy seems to be triggered by the belief that petrol vehicles are luxury toys for the elite. It unfairly hits the owners of about 60 million petrol-engined two-wheelers and 12 million petrol-powered cars. Very few of these cars are SUVs or luxury saloons; over 75% are small hatchbacks. Why should these users, who are usually middle class salary earners, be so unfairly punished? Diesel consumption is also nearly four times more than petrol. So taxes on petrol will not be able to cross-subsidise diesel, kerosene and LPG for long.

The main beneficiaries of the continuing subsidy on diesel in relation to petrol are the fuel adulterators. Though they mostly use subsidised kerosene and naphtha (raw petrol without additives and most taxes), they can add up to 10% diesel to the petrol without any problem. Low cost diesel has also benefitted the affluent segment of the diesel gensets that consume roughly 10% of all India’s diesel for offices, malls, cinemas, condominiums and industries that surely deserve no subsidy. They can get bulk supplies that can be easily monitored at full prices.

Perhaps Rahul Gandhi should now get on a motorcycle to show the people that opposition politicians, who can’t do simple arithmetic, are unfit to lead the country.

Murad Ali Baig writes on automobile-related issues. The views expressed by the author are personal.