Tuesday, June 12, 2012

Rotten politics begets rotten economic policies….additional excise on diesel vehicles the latest example….

For completely ridiculous reasons, the Government prefers to increase the excise duty on diesel cars so as to recover subsidy on diesel fuel. The normal thing to do would be to increase the price of diesel (maybe slowly), so that the subsidy would keep coming down over a period of time. But given the rotten political landscape that exists, it is more acceptable politically to increase excise on diesel cars than to increase diesel prices.

Let me explain the rotten politics first. Just imagine what would happen if the diesel prices were increased even marginally. Without a doubt, there would be a huge political uproar. If there can be a political uproar when petrol prices are hiked, there would surely be a bigger one if dieself prices were touched. The BJP as usual would find a clever excuse to stage a bandh: This government doesn’t care for the poor. Or why is the price hike so steep? Or why did the government not increase prices for so long? And conclude by demanding someone’s resignation, if not the entire government’s. Team Anna would be back saying this is a sign of corruption and maybe the entire Government should be probed for it (you see, activists don’t have to produce evidence or follow the institutions of the country)! The Left would shout hoarse too. And all this assumes that Mamata Banerjee would approve of the price increase in the first place – an impossibility. So don’t blame the Congress alone for not taking the right path to reforms. Blame all the politicians.

Now let’s see what’s rotten about this economic decision. The first rotten thing is that it puts the onus of paying for the diesel subsidy only on the new car buyers. The ones who already own diesel vehicles get away scot free. Given the fact that the existing pool of diesel vehicles is far more than the new sales of diesel vehicles made every year, this puts an unfair and huge burden on the new buyers. Maybe the government will prefer not to increase excise duties so much….in that case, it will be unable to recover the full subsidy. In other words, this policy will end up being mere tokenism.

The second rotten thing is that in a situation where the industrial production is already down, this will ensure that at least the auto sector goes into a tailspin. Further, the new buyers will have to pay the entire subsidy burden upfront. This is surely going to kill the diesel car industry. I’m not sure the government should want to do that.

The third rotten thing is that this apparently is being done only for “cars”. Do SUVs like the Toyota Innova, or the range of Tata and Mahindra vehicles – all of which are used extensively for rural and semi-urban transportation purposes – or the much more premium SUVs (Honda CRV, Merc, BMW and Audi SUVs etc etc) used largely by the urban rich all get covered under this policy of higher excise duty? I doubt they do, for if they did, then a lot of the rural folks would get affected, and a politically afraid government would like to avoid that. If the higher excise duties don’t apply to all vehicles, then basically the government would have to find a way to exclude the higher end of SUVs while still giving the benefit to the lower end ones. So basically, we will have arbitrary rules in play. Some bureaucrat will decide on an involved excise regime…..This is crazy and fundamentally illogical.

The fourth rotten thing is that the calculations that the government would do in calculating this upfront additional excise duty will be inherently flawed and unfair. Has the government considered the better mileage (kms per litre) of diesel cars? What if the distance covered in a year is less (say 10000 kms only) for some and more for others? Shouldn’t the upfront payment vary with usage? Further, does a car last for 10 years at all as the government’s thinking appears to be? In today’s world, by the time a car is 6-7 years old, it is pretty much near its end. If used beyond this period, it would have become a fuel guzzler and then the entire calculation goes awry anyways. One last small hiccup. As fuel prices keep rising (sorry…..as petrol prices keep rising), and the gap with diesel keeps becoming more and more, are we saying that the additional excise duty will also keep rising? In other words, rather than changing diesel pricing, we would be changing excise duties every two weeks! And what if the gap drops? Then will the government be intellectually honest and lower the excise duty?

One last point. What kind of an industrial climate are we creating here? While the government is within its rights to change its fiscal policies, every government tries to assure industrialists of consistent policies. This decision would come after years of investments made by industrialists in diesel car manufacturing. Can the government instantaneously change its excise policy or should it give a few years for manufacturers to adjust their strategies. In short, should the government make this policy applicable from now itself or from some future date five years or more away?

It’s crazy really. Finding convoluted solutions to really simple problems. And then those convoluted solutions will create new problems which will require even more convoluted solutions. Remember the days of the License Raj? Similar convoluted structures existed then too. There were subsidies given to small scale manufacturers and many sectors were kept out of reach of the big boys. For example icecreams were reserved for the small sector. So the big boys produced “frozen desserts” rather than “icecreams”! And the small guys produced such lousy icecreams that no one had them anyways. Indians would go abroad and hog the much better icecreams available there! Just imagine those days. In small but sure steps, we are heading in that direction now.

What should be done is that diesel pricing should gradually be freed up – say over the next 5 years. The assurance the government should give to the people is that the entire saving of subsidy would be diverted towards setting up of new public transport. New metros, new BRTS systems and new modern buses. I am sure the people would support such initiatives.

Otherwise, this current policy will support petrol cars. And petrol cars are fundamentally more inefficient in usage of fuel compared to diesel cars. Sad….really sad.

The real truth is that convoluted, dangerous and rotten politics is forcing the government to think of convoluted, dangerous and rotten economic policies. Don’t blame the Congress for this. Any political party would do the same given its need to survive. It’s time for us to wake up and raise our voice against stupid economics. And stupid politics….

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