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Oil Min Wants Huge Hike in Diesel Car Duty

Diesel Vehicles to cost more? The oil ministry has supposedly requested a steep hike in excise duty for diesel cars, of at least Rs. 170,000 per small car and 255,000 on larger cars. This would take car prices up upto 30% higher than current levels. From MSN:

In a letter to the Finance Minister, Mr Pranab Mukherjee, the Petroleum Minister, Mr S Jaipal Reddy, has recommended that an excise duty of Rs 1,70,000 should be imposed on small cars, while medium and larger diesel-run vehicles would attract Rs 2,55,000.

This has resulted in auto stocks getting hammered. The CNX Auto index is down 1.71%, while Maruti, M&M and Tata motors are down 2% each. Strangely even Hero Motors is down (they manufacture only petrol motorbikes!), and you can chalk that up to sentiment.

However, this will only stall further sales of diesel vehicles, so it’s all right for motor company stocks to be hit. The current set of diesel vehicles will continue to use the much cheaper fuel (now about 40% cheaper than petrol).

Remember that this is just a recommendation, which, going by recent events, will be hammered down by Mamata Bannerjee.

The only way thing could get better is:

Slowing World Growth >> Dropping crude prices >> Petrol comes close to Diesel >> Free fuel prices

But what is more likely:

Crude prices drop >> Petrol prices don’t >> When Asked Why >> They tell us about Diesel losses >> Everything goes to hell and back.

or

Some sort of QE happens >> Crude prices go back up >> Oil losses threaten fiscal deficit >> Govt refuses to hike Diesel Prices >> Eventually, huge crisis.

What I expect from the inept handling of the situation is that we will eventually see massive fuel shortages, because the government won’t get its act together till then.

My suggestion would be to simply free all fuel prices and encourage competition. Inflation will be temporary; we’ll drop use so dramatically that international prices will drop meaningfully as well. In the long term, that’s the only sustainable method. In the short term, we’ll all suffer.

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