Up to it, FM?

Up to it, FM?

The memory of last year's oil price hike, and its economic and political fallouts, has faded from memory. As India awaits the 2007-08 Union budget, newspapers are abuzz with reports of more tax cuts for cars--this time, bigger cars. The car industry is pushing for this.

Are more sops on the anvil? Since 2001, Union budgets reflect a bias towards the car industry, at the cost of serious repercussions on energy and pollution. Massive and successive excise cuts have been allowed. Last year's additional sop for small cars and special allowance for small diesel cars opened the flood gates.

Despite enjoying hidden subsidies--not paying the cost of pollution and health damage, the cost of using up urban space for parking and roads and social impacts--the car industry continuously externalises the true costs of its products; government allows it to minimise tax contribution, and so loses revenue.

There is no official recognition of the fact that by providing incentives for small cars without setting an effective fuel economy target for different vehicle classes, India cannot avert the great guzzle. The small cars will be less efficient than they should and can be.

And without investment in alternative mass transport, their numbers will grow and negate any benefits of fuel economy. The increased status associated with bigger vehicles, with poorer fuel economy and non-existent fuel standards, will only worsen India's energy insecurity.

The Union budget cannot and will not be the complete solution. It is the Central government that has to set fuel economy regulations to push the car industry to improve technology significantly. It is the state governments, which have to reduce passenger taxes on buses and increase road and other taxes on personal vehicles.

But it is the finance minister who can give the right signals.

Tax cars, not buses The minister should craft taxes to support energy efficiency policies for the transport sector as a whole. At the very least, he must maintain a differential between small and big cars. But he must also increase taxation on cars--big and small--and compensate by incentivising public transport system from buses to metros.

Buses are part of the solution to the energy, pollution and mobility crises. The forthcoming budget should remove excise taxes on buses and allow its rapid expansion, already planned under the Jawaharlal Nehru Urban Renewal Mission.

Carrot and stick The finance minister should do well to design tax in a way that curbing one evil does not encourage another. Take the case of diesel cars. Diesel is supposedly kept at lower prices than petrol because government says that it is needed for the essential economy. This huge differential is pushing a massive shift towards diesel cars and suvs, with serious public health consequences.

The options are two-fold. Either the government stops the use of diesel for personal vehicles or it removes the price differential between petrol and diesel in the use of private transportation. It can do so by imposing an additional 'environment' cess on diesel cars, which would effectively nullify the price advantage.

To promote diesel vehicles in the name of fuel efficiency, without any obligation to meet fuel economy standards and stringent emissions norms, will work against emission and energy gains. Diesel, being cheaper, also induces more driving, so offsetting both energy and emissions gains--a double loss.

cse has estimated the revenue loss on account of diesel usage in cars.Because petrol is taxed heavily, contributing to government revenues, while diesel is relatively less so, each additional diesel car entails a lower revenue for the government. With diesel cars expected to be nearly 50 per cent of the new car sales by 2010, the government will progressively lose revenue from this segment due to the tax difference on diesel and petrol fuels. Diesel car owners recover their 'small' premium for a diesel car within four years because of cheaper fuel. But government shoulders the massive losses--as a subsidy to the rich--in perpetuity. The increase of vehicles running on diesel effectively means that government will subsidise the luxury use of diesel in the country.

It is now time, finance minister P Chidambaram, to set new terms; to act; to make a difference.

With inputs from Vivek Chattopadhyay, Jayeeta Sen and Priyanka Chandola
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