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December 18, 2006
Shri P Chidambaram
Union Minister of Finance
Ministry of Finance
First Floor, North Block
New Delhi
Dear Shri Chidambaram,
I would like to take this opportunity to draw your attention to our
recent review of the impact of the exponential increase in the number of
vehicles on pollution, congestion and energy consumption in Delhi and
other cities. We are extremely concerned to note that the current tax
policies are aggravating the trend towards diesel cars and bigger cars.
Both are detrimental to air quality and energy consumption. Fiscal
policy is distorting the car market in ways that the mitigation of its
economic and health impacts will be well beyond the government’s own
capacity for managing, and reducing, the economic and health risks.
I would like to highlight the key concerns for your consideration and
policy action:
1. Fiscal policies encouraging motorisation and dieselisation
A large number of polluted cities are trying to address the specific
challenge of vehicular pollution – the most rapidly growing source of
pollution in our cities today. Over the last 10 years (1996-2006), the
total personal vehicle registration in Delhi for instance has recorded a
staggering increase of 105 per cent. Cars alone have increased by 157
per cent -- an effect of uncontrolled increase in personal mobility.
According to the latest Economic Survey of Delhi 2005-06, Delhi has
added 3.63 lakh vehicles only in one year and all vehicles are
responsible for 72 per cent of the air pollution in the city.
It is very worrying that while there is still no roadmap to get clean
diesel fuel that can enable use of advanced emissions control devices to
clean up diesel emissions and reduce its toxicity, the official policies
are encouraging massive dieselisation of the car fleet. In Delhi diesel
cars have increased by 425 per cent over the last decade. The total
diesel fuel consumption that was lowered with the ascendancy of CNG
during 2000-04 has begun to increase again. While public transport in
Delhi has been effectively kept away from poor quality diesel, it is
making a comeback through personal transport and is threatening to
nullify the air quality gains. Delhi has phased out 12,000 diesel buses
to escape from the lethal effect of toxic diesel particles. But even at
a very conservative estimate, the total number of diesel cars in Delhi
is equivalent to adding particulate emissions from nearly 30,000 diesel
buses.
According to the information from the Society for the Indian Automobile
manufacturers (SIAM) the market share of diesel cars have already
increased to over 30 per cent in the last 18 months. The share of diesel
cars is expected to be 50per cent of the total car sales by 2010. In
Delhi, while petrol cars have increased at 8.5 per cent annually, diesel
cars have maintained a growth rate of 16.6 per annum – just the double.
This overwhelming growth can be devastating in cities desperate for
solutions to smoke, particles and NOx. According to WHO and other
international regulatory and scientific agencies diesel particulates are
carcinogens.
The policies of the Union government to encourage car production, and
sales are in conflict with the city-based action to control vehicular
pollution. Massive investments planned under the 10-year Automotive
Mission Plan designed to make India an auto manufacturing and export
hub, while ebullient on fiscal benefits, have not considered pushing
investments towards clean technology. But the government will forego
public revenue through tax incentives to produce polluting technologies.
This, together with the delays on enforcing Euro IV emissions standards,
will only postpone the entry of cleaner technology in our polluted
cities.
2. Government is incurring huge revenue losses due to dieselisation
of car fleet
In economic terms, the current fiscal policies that are encouraging
diesel cars will force the government to absorb colossal revenue losses
on account of the ‘luxury’ consumption of diesel. Our preliminary
estimate shows that with diesel cars expected to be nearly 50 per cent
of the new car sales by 2010, the government is in danger of
progressively losing revenue from this segment. While the Union
government earns nearly Rs 14.74 from every litre of petrol used by a
petrol car as excise, it earns a mere Rs 4.93 from a litre of diesel
used by a diesel car. If we add both central and state fuel taxes, then
with every new diesel car the government loses as much as Rs 12,000
annually, in relation to a petrol car. Its cumulative effect on a
nation-wide scale is staggering -- enough to fund substantial refinery
upgrades to produce clean diesel. It is worrying that while diesel car
owners recover their premium for a diesel car within four years (given
lower diesel fuel prices), the government shoulders the massive losses
as a subsidy to the rich, in perpetuity.
Keeping in view the fact, as SIAM has recently divulged that out of cars
sold only in the month of October, 25,000 are diesel variants, then the
Union government has lost as much as 30 crores in excise and if averaged
for the whole year the losses can be more than a whooping Rs 300 crore
on a nation-wide scale! This will only grow bigger with time.
3. Tax concession for small cars is a loophole for increasing diesel
car sales
The revenue losses will continue to mount as the further incentives
granted to the small cars and special allowance made for the compact
diesel cars under the last Union budget will progressively expand the
share of the diesel segment. The Union Budget of 2006 has allowed
reduction in the excise duty to 16 per cent from 24 per cent for small
cars. But this segment has been defined as a car of length not exceeding
4,000 mm and with an engine capacity not exceeding 1,200 cc for petrol
cars and 1,500 cc for diesel cars. The more relaxed limit for diesel
cars has brought within net a large number of mid segment diesel cars to
qualify for the tax cut. SIAM has released an indicative list of car
models, which will enjoy excise duty cut. These include five models of
Maruti Udyog, -- 800, Alto, Wagon R, Zen and Omni, one model of Tata
Motors - Indica (diesel) and Hyundai Motor India’s Santro model. The
small car concession has resulted in price cuts for diesel cars by about
Rs 12,000 to Rs 25,000.
4. The recent reports on possible excise cuts on big cars will
further worsen energy security
Such a fiscal move will be detrimental to the fuel economy advantages of
the small cars that are currently 80 pre cent of the total volumes.
Worldwide governments are increasing taxes on bigger cars especially the
SUVs to minimise the energy and pollution impacts of the bigger
vehicles.
5. Fiscal incentives cannot be granted for fuel efficiency unless
specific fuel economy standards are mandated and fuel economy labelling
of vehicles are enforced.
Any tax policy on the grounds of fuel efficiency must be linked with
legal mandate to meet fuel economy standards and fuel economy labelling.
Otherwise diesel cars will be encouraged by default with adverse health
and economic impacts. Other governments (European Union, Japan, China
and the US) have taken steps to enforce fuel economy regulations to
improve the fuel efficiency of vehicles along with stringent emissions
standards. But India while low on technology ladder has not set fuel
economy regulations and is losing out on all fronts -- Indian small
diesel cars are more than 20 per cent less fuel-efficient and 50 per
cent more polluting than their counterparts in Europe.
6. Need fiscal strategy to phase in clean diesel fuels to enable
advanced emissions control technologies
Concurrent strategy is needed to phase in clean diesel fuel on an
accelerated scale. Fiscal incentive can play an important role. While
there are a variety of market-based instruments that can be adopted to
phase in clean diesel fuels (with sulphur levels well below 50 ppm,
ideally 15 ppm), under the conditions of partial reforms it could be
more effective if the government makes the consumer pay for the capital
investments in a more direct manner. Therefore, an additional surcharge
on a litre of fuel sold can create a fund to finance the fuel quality
improvement programme. The convention of imposing a surcharge for social
programmes like education is already in vogue. Using a similar surcharge
for environmental reasons can support a one time capital investment in
refineries linked with stringent clean fuel quality target.
The current tax policies expose contradictions and fissures in public
policy. More diesel cars without a strict clean up target means more
severe pollution; more diesel cars without a tax correction means more
revenue losses; more diesel cars and cheap diesel under the garb of fuel
efficiency means more induced driving, more oil guzzling; and more
diesel cars and cheaper rides delay the entry of the ultra
fuel-efficient and low emissions vehicles, like hybrids, battery
operated vehicles and other alternative fuelled vehicles. Fiscal
policies should help to speed up the transition to cleaner vehicles and
fuels.
In view of the aforementioned concerns urgent steps are needed to
rationales taxation policy to remove incentives for diesel cars and
bigger cars. India, choking on toxic particulates and in danger from
rapidly rising NOx levels, will have to avoid the intermediate European
standards of Euro II and Euro III. In Asia, Hong Kong has discarded the
European diesel car norms as inadequate to address public health
concerns and adopted more stringent Californian standards only for
diesel cars. China is set to meet Euro IV standards sooner than India.
The major fuel markets including China, Singapore, Thailand have begun
to tighten emissions and fuel quality regulations for diesel. China, the
US and United Kingdom keep the gap between diesel and petrol prices
narrow or equal that prevents the growth of diesel car numbers.
We would like to urge that the growing Indian car market cannot be held
captive to polluting diesel technology:
i) Levy a special
environment cess on diesel cars and SUVs to nullify the price
advantage of diesel fuels and restrain their growth. Revenue from
this can help in refinery upgrades to produce clean diesel.
ii) Enforce mandatory fuel economy standards for all
categories of vehicles and fuel economy labelling of cars. Fiscal
measures may be linked with them.
iii) Give tax concessions for introduction of more advanced
vehicle technologies like hybrids, battery operated, alternative
fuel technologies etc and those that meet more stringent emissions
standards before due date of implementation.
I sincerely hope that you will share
the public concern and the need for effective and immediate action. We
therefore, look forward to your urgent intervention in the matter.
Yours’ sincerely
Anumita Roychowdhury
Associate Director
PRESS RELEASE
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