Diesel Automobiles Scam

An advertisement currently running on TV for Chevrolet’s Beat Diesel has the closing line “Fuel is getting less expensive.” Since the sharp rise in petrol prices was headline news just recently, one was surprised at first, then shocked. Which was surely the intention, to get the viewer to think and figure out the message namely, DIESEL is NOT getting more expensive, so buying a diesel car makes sense. Indeed the entire series of ads General Motors has run for the Beat Diesel has focused on the low price of diesel. And thereby hangs a tale.

The nation has been gripped by one scam after another, with allegations, findings by statutory bodies and even criminal cases of wrong doing, bribery and corruption. Commonwealth Games contracts, the Karnataka mining scandal, 2G telecom spectrum, KG basin natural gas exploration: there is a long list of dubious deals with corrupt politicians, officials and businessmen conniving with each other to subvert public policy, to favour a chosen few and rob the exchequer as well as the taxpayer. Public anger against this venality was evident during the Anna Hazare led agitation against corruption by public servants.

Many on the Left had argued that such crony capitalism went beyond individual corruption or rent seeking, and that systemic corruption had increased sharply since liberalization of the Indian economy in the early nineties, which ironically had been ushered in supposedly to curb the license-quota system. It was also pointed out that public policy could also be, and was being, subverted even without any obvious bribery, yet favouring a whole  class or section of industry, and transferring huge amounts of money to this favoured group at the cost of the taxpaying public and the exchequer.

The scam in diesel passenger automobiles is a typical example. Whether or not there is any bribery involved only time will tell, but there can be no doubt that a scam of monumental proportions is taking place under our very noses and in broad daylight.

Diesel continues to be heavily subsidized, and is therefore considerably cheaper than petrol, following a decades-old policy. Thus even while petrol prices have been de-controlled since 2010 and supposedly follow global market trends, diesel prices continue to be fixed by government at comparatively much lower rates even though international prices of both commodities are roughly the same. Argument has been that diesel is used by farmers for pump sets and tractors, and by heavy road transport vehicles and the railways to move essential commodities including foodstuff and other goods, and therefore any rise of diesel prices will have a cascading effect on consumer prices especially of food items, with particularly severe impact on lower income groups.

But of late, an entirely different class of people, middle-class and wealthier owners of diesel powered personal vehicles and automobile manufacturers are benefiting from this subsidy, entailing a huge transfer of money to these sections and a massive loss to the exchequer and to oil marketing companies. The UPA government and supporters of its neo-liberal policies continually and stridently advocate dismantling of subsidies even in food grain as witnessed in the on-going debate on food security and the public distribution system. Yet the UPA government is coolly watching this transfer of resources to corporates and better-off sections through diesel subsidies, and yet is doing nothing about it.

Diesel car sales galloping

Even a recently as a decade ago, diesel passenger vehicles constituted only 4% of all 4-wheeler personal transport vehicles in India. But with the large price difference prevailing between diesel and petrol, consumers of passenger vehicles are shifting to diesel vehicles in huge numbers.

Currently as much as 30% of all passenger vehicles sold have diesel engines, and this is expected to go up to around 50% in the next few years. Demand for passenger vehicles has roughly doubled in the past decade, but within that, demand for diesel vehicles has gone up by a shocking 430%! According to some industry analysts, current demand for diesel passenger vehicles is already around 60% if one accounts for all categories and for pent up demand. So much so that all manufacturers today have a waiting list of several months for diesel models while petrol driven cars can be bought over the counter.

All automobile manufacturers have launched diesel models over the past two years. Volkswagen launched diesel versions of the polo and Vento last year, and of the Jetta a few months ago. While European car makers have a long history and even currently high sales of diesel automobiles, even US and Japanese manufacturers which do not have joined this dieselization trend in India, and that too with a bang. Apart from GM’s Beat diesel, Ford launched diesel variants of the Figo in 2010 and of the Fiesta in 2011. Even Toyota which was initially reluctant, has launched diesel versions of the Corolla Altis, Etios and Liva during 2010-11. Market leader Maruti Suzuki has launched diesel models of its SX4, Kizashi and the highly popular Swift, and in some models almost 85% of sales are of diesel variants. Tata Motors’ Indica and Vista, Mahindra’s Verito, Hyundai’s new Verna and Renault’s Fluence are other recent additions. Earlier, diesel power was common mainly for larger vehicles, and concerns have been expressed by many commentators at the sudden spurt in purchase of gas guzzling SUVs. But now, given the present trend, even tiny cars such as Maruti’s Alto and Tatas’ Nano are coming out with diesel variants.

So high is the demand for diesel vehicles forecast by Suzuki, which has limited capacity to make diesel engines in India and does not itself design diesel engines in any case but manufactures them under a joint Suzuki-Fiat venture, that it has recently announced a deal to buy 100,000 diesel engines from Fiat which manufactures these engines in a Tata-Fiat joint venture plant in Maharashtra. Ford which has taken an early lead in the diesel stakes in India, has enhanced its Pune plant manufacturing capacity to 250,000 diesel engines. Hyundai is planning a new Rs.1500 crore diesel engine plant in Tamil Nadu while Honda, which like most Japanese car makers is globally almost exclusively a petrol car player, is also reportedly contemplating a diesel engine for its soon to be launched small car in India.

Loss for whom, Subsidy for whom?

From the buyer’s point of view, as sought to be exploited by the GM Beat Diesel ad, the choice is clearly driven by cheaper diesel prices. Diesel vehicles are more expensive than their petrol variants. In mid-size models, difference in price is around Rs.70,000 to Rs.100,000. But the diesel costs about 40% less than petrol, and also typically give 20% or so more mileage. Contemporary diesel engines are fuel-efficient and maintenance free unlike those of a few decades ago and the earlier image of dirty, smoke-spewing noisy engines no longer applies. Running costs are therefore 60% or more lower than petrol driven vehicles, a huge benefit in the eyes of cost-conscious Indian buyers.  A diesel car owner can thus recover the additional initial cost in around 4 years based on an average use of 15,000 km a year.

Clearly, buyers who can afford to pay up to a lakh of rupees extra for a mid-size car are the ones who benefit from the diesel subsidy to the tune of around Rs.20,000 to Rs.25,000 annually. Not to mention buyers of large luxury diesel vehicles such as Mercedes, BMWs and the like who don’t blink at the lakhs or even crores for these luxury cars but who also benefit from diesel subsidies.

Diesel powered passenger vehicles are today the second largest consumers of subsidized diesel with 15% share of total diesel consumption. Agriculture and public transport buses account for only 12% each. While trucks account for 37% diesel consumption for goods transport, railways consume only 6%: unfortunately freight transport by rail has been grossly neglected by successive governments even though trains use only one-fourth the fuel of road transport for equivalent weight and distance.

Oil marketing (OMCs) companies complain that under-recoveries in diesel are now hurting them badly. They estimate losses of around Rs.67,500 crore annually on diesel alone, about 60% of the total losses of the OMCs, a figure confirmed by the Ministry of Petroleum & Natural Gas! At 15% consumption of diesel by passenger vehicles, this amounts a direct subsidy of over Rs.10,000 crore annually to owners of diesel cars!

Loss to the exchequer was the main issue in the 2G scam.

In the case of subsidized diesel for passenger vehicles too, the exchequer is losing massive amounts. The Central Government earns Rs.14.74 as excise duty on each litre of petrol sold. But it earns only Rs.4.93 per litre for diesel, a loss of close to Rs.10 per litre of diesel. At total diesel sales for passenger vehicles amounting to over 7.8 billion litres (15% of about 52 billion in 2009), this amounts to a loss to the exchequer of around Rs.7800 crores annually. And with each increase in petrol prices, and with galloping demand for diesel passenger vehicles, the annual losses to the exchequer will skyrocket.

Diesel Pollution

There is another important reason to curb the dieselization of private transport in India, and that is the extremely harmful effect of pollution by diesel vehicles. Limitations of length prevent a more detailed discussion, but a few salient facts may be highlighted.

Delhi followed by other cities banned diesel buses, taxis and autorickshaws and mandated their conversion to CNG because of diesel pollution. As pollution monitoring data has shown, and citizens of Delhi will aver, pollution levels came down considerably due to this measure. But the effect has now been completely nullified, indeed the situation has got worse, due to the proliferation of diesel passenger vehicles in Delhi.

Pollution monitoring data by several agencies including the Central Pollution Control Board testify to the worsening of air pollution in Delhi, chiefly in respect of increase in particulate matter (PM) especially PM10 (particles of 10 microns and smaller, which enter the respiratory system) and PM2.5 (which can penetrate into the lung, and classified as carcinogenic by WHO) and NOx (nitrous oxides), both known diesel pollutants and dangerous to human health.

These show PM10 declining from 2001 onwards but starting to increase again after 2005. PM10 levels in residential areas which was at 149 micrograms per cubic metre in 2001 registered 209 in 2008. The Institute of Tropical Meteorology, Pune, found that PM2.5 was at unsafe levels all year round and had reached 280 micrograms per cubic metre  against the safe limit of 60, and well above the level classed as ‘very unhealthy.’

Govt unwilling to tackle

Even in the face of all this evidence, and the mounting burden of this totally unnecessary subsidy to better-off personal vehicle owners, incentive to automobile manufacturers and huge costs to public health, government has been unable and unwilling to act. And this despite strong recommendations by numerous studies including by government appointed committees.

The Expert Group on Viable and Sustainable Pricing of Petroleum Products chaired by former Planning Commission Member Kirit Parikh had in February 2010 made a series of recommendations. There may certainly be disagreements with several of them including the central one of total decontrol of petroleum prices. But one recommendation pertaining to the issue of personal diesel vehicles has immense merit and has been welcomed by many quarters. Indeed a similar measure was independently also suggested in these columns a few years ago.

The Expert Group Report suggested that, in order to offset the loss to the exchequer and to provide a level playing field to users of both petrol and diesel driven vehicles, an additional duty of around Rs.80,000 be charged and remitted to government on each diesel passenger vehicle up-front at the time of sale. The amount was arrived at based on average usage of each vehicle (taken as 8000 km/year) and the benefit that the user would have got through lower excise duty on diesel over a 10 year period. This author has a different set of calculations that would put the up-front levy at around Rs.125,000.

Whatever the figure, the proposed measure has several advantages. Chiefly, it avoids a disastrous resort to dual pricing, one price for trucks and trains, and another for passenger vehicles, which would only encourage a black market in diesel, besides being almost impossible to enforce. It neutralizes the running cost advantage and subsidy that diesel vehicle owners enjoy now, levels the playing field between diesel and petrol driven cars, and avoids ruinous losses to OMCs and to the government through revenue losses.

Seems a win-win. Petroleum Minister Jaipal Reddy spoke of such a measure being one possible way of avoiding loses to OMCs but said the Finance Ministry would decide among several alternative proposals sent to it. However, a Group of Ministers headed by Finance Minister Pranab Mukherjee decided in June this year not to accept the Expert Group recommendation of an additional up-front duty on private diesel vehicles. At the same time, faced with mounting losses of OMCs and loss to the exchequer, as well as with embarrassing questions from many quarters, he announced in August that “some measure” would be taken to curb subsidies to private diesel vehicle owners, but failed to say what, and no decision has been taken by government since then.

Meanwhile, automobile manufacturers are laughing all the way to the bank, while more and more better-off car owners happily pocket thousand of crores of subsidy on diesel meant for freight transport and agriculture.

And all the time the powerful Society of Indian Automobile Manufacturers (SIAM) which is not only a highly influential industrial lobby but also has representation on all important government committees, have lobbied hard against any move to curb dieselization of personal transport and have categorically stated that they are “very strongly opposed” to any additional levy on private diesel powered vehicles.
Whose government is it anyway?