It is a pity that Union Finance Minister Pranab Mukherjee has had to withdraw his statement in Parliament that the government would consider the suggestion to end the subsidy on diesel used in passenger cars. Three days after he had made the statement, he said no such plan was in the works, nor was there a proposal to change the present structure of duties in this regard. Meanwhile, his first pronouncement sent the stocks of auto companies down — the firms are already apprehensive about an impending economic slowdown in sales. Surprisingly, Mr Mukherjee, a veteran with innumerable years spent in important economic portfolios, is not given to shooting his mouth off. What prompted him to say something that he had to retract later is a matter of speculation. However, the episode provides an opportunity to restate certain well-known realities.
Dual pricing for diesel has not been attempted so far because, going by the experience with kerosene, it will be extremely difficult to handle gross misuse. Moreover, the downside will be enormous since the diesel bill is far higher than kerosene’s. Considering the extent to which fuel pump franchisees go for the hike of a few paise in their sales commission, a difference of over Rs 6 in the price, the extent of current subsidy on diesel will offer tremendous inducement to create supply of diesel in the black market. As for demand, the owners of modern diesel cars, some of them quite large and costly, may hesitate to go for black-market diesel of dubious quality. That, however, cannot be said for the drivers of lower-end taxis, whose number is large.
On the other hand, nothing can justify subsidising the sale of diesel to private car owners, particularly when it is the large and costly cars that have tended to be diesel-powered. But the perverse incentive that the subsidy offers has prompted car manufacturers to research and produce diesel engines for increasingly smaller cars offering a good driving experience. There is only one way, and that too partially, to mitigate the situation: raise taxes on the sale of diesel cars. Subsidising diesel, or for that matter any form of energy when the country is facing energy scarcity and is dependent on imports, is wrong. This is because under-pricing does not encourage conservation. Even farmers, for whose benefit the subsidy is partly intended, need to pay more for diesel used in their generator sets so that they rely less on groundwater, which is being exploited indiscriminately. There is a case for subsidising public transport, not diesel, and technology now enables accurate targeting. If every bus or truck is fitted with a global positioning system device, then all trips can be monitored and subsidies can be provided accordingly.