December 18, 2011

Private diesel vehicle sales should be taxed

The crux of my argument is that the diesel used for private purposes is not meant to be subsidized and such usage should be charged/taxed appropriately. 

The diesel price in India can be broken up into simple components. The retail diesel price = (actual cost of diesel) + (Central & State Govt. taxes) - (Subsidy by Central Govt.)

Economists would call it inefficient because the taxes and subsidy provided by the government neutralize each other a bit. The benefit is that the government does not let the local diesel price reflect the volatility of international prices.

The beneficiaries of subsidized diesel include farmers using tractors for agriculture, truckers who transport foodgrains and materials all over the country, public transport buses that transport millions across the country, and many others. But, the list also includes the owner of a diesel car/SUV for private use.
Make no mistake, a private vehicle is an item of convenience. In other words, a person owns a private vehicle (petrol or diesel) to avoid travelling by public transport. Absolutely nothing wrong with that, until the diesel vehicle owner expects the government to subsidize him for it.

It is quite shocking to see how many private diesel vehicle owners believe that subsidized diesel is their birth-right. Clearly, the subsidy is not meant for this category of diesel users. Since they pay the tax component of the diesel price, they claim that it is the government's obligation to subsidize them for their diesel joyride. But, they forget that the tax is paid even by the intended user of the subsidized diesel. On the other hand, there should be a mechanism to charge the private diesel vehicle owners for using subsidized diesel. 

Ideally, local diesel prices should be deregulated and reflect the international oil prices. This would even promote conservatism among the citizens and more efficient use of the fuel. But doing so in one sweeping move could prove catastrophic for the national economy. 

So, if diesel subsidy has to be maintained (and reduced gradually) it has to co-exist with a mechanism of charging the unintended benfactors of subsidized diesel. Possible approaches could include differential pricing of diesel (which could lead to black-marketeering), an annual tax on private diesel vehicle owners (which would be tough to implement efficiently) or a one-time tax on private diesel vehicle sales (could result in a dramatic reduction in sales of private diesel vehicles). A one-time tax on private diesel vehicle sales seems to be the easiest to implement efficiently. Such a tax could increase the revenues of our government which could be in-turn used to subsidize the fuel. Hopefully, this would also lead to the government reducing some of the taxes on diesel and in-turn its retail price.

The flip-side is that private diesel vehicle sales could drop dramatically from current levels. And people would go back to choosing a petrol or diesel vehicle based on parameters like performance, fuel-efficiency and the average kilometres they would clock in a week. Till we move to an ideal solution (which arguably might never happen), taxing private diesel vehicle sales seems to be the only way charge them for using subsidized diesel.

Do you see any other mechanism to implement such a charge? Then I would love to hear it.

Disclaimer: I maintain this opinion in spite of having a diesel vehicle in the family.

December 03, 2011

Suzuki Takes VW to Court

Do refer to our earlier post for a quick recap of how it all started.

Suzuki has filed for arbitration in the International Court against VW. Suzuki wants its shares held by VW (as part of the earlier agreement) to be returned, while VW is not interested in giving up a 20% stake in the competitor that easily.

While the details of the arbitration process do not concern us, our takeaway is that the back-door talks have failed. The co-operation agreement between VW and Suzuki has been effectively shelved.
Although a discussion on potential implications on Suzuki is out of our scope, the implication on our market is that nothing changes at Maruti Suzuki. Maruti will now continue to source diesel engine technology from Fiat Powertrain and we will continue to enjoy powerful yet frugal diesels from Maruti.

It is also likely that Maruti will license Fiat's new award-winning Multi-Air engines. These are petrol engines (developed primarily for Europe) that dynamically control combustion in each stroke within each cylinder of the engine. The end result is increased fuel-efficiency and lower CO2 emissions. A small displacement and fuel-efficient petrol engine sounds ideal for our market.

Apart from that, VW will now have to work alone and hard at cracking the Indian market using their VW and Skoda brands. They surely have their work cut out.

Finally a New (hopefully fixed) TATA Nano

And good sense has prevailed...

We believe that it is mighty important that the Tata Nano succeeds in the Indian market. Many families do travel (with kids perched precariously) on 2-wheelers. Even if few of these families shift to the Nano, it could save many from potential injuries/harm. That said, not at the cost of adding a more serious risk to their lives.

Someone at Tata Motors has finally realised that the only way to jump-start Nano sales was to shelve the current Nano and come up with a "new Nano".
2012 TATA Nano

It sure took them a lot of time to realise that more than two dozen Nanos bursting into flames will not be considered as "independent, unrelated  incidents" by potential buyers. Irrespective of how loudly Tata Motors claims it to be so. Buyers were not even moved by claims that the fire incidents were a propaganda against the company. Sorry Tata, we were not ready to bet our lives on that claim of yours. Heck, if this were the US, the NHTSA (National Highway Traffic Safety Administration) would have ordered the cars off the road within the first couple of incidents.

It was quite obvious, the only way get the fire monkey off Nano's back was to bring in a "new and improved" one and hope that those do not burst into flames. One sincerely hopes that Tata Motors' R&D department has identified the root cause of the fires and taken care of it.

Other than the potential fire fix, the new 2012 Nano is claimed to be more powerful (38PS vs. 35PS earlier) and fuel-efficient (25.4 kmpl vs. 23.6 kmpl, as per ARAI tests) than the earlier one. Also, features that were earlier offered in the mid and high end model would now make it to the base model.

We are eagerly looking forward to the 2012 Auto Expo and hope that we get to see the diesel Nano too. A car giving more than 30kmpl mileage, wouldn't that be something!!