India Tax Freeze Heats Up Diesel Expansion

India’s auto makers are elated that the government did not single out diesel cars or fuel for fresh taxes in its latest budget.

With the taxation question resolved, at least for now, Indian car makers are preparing to implement their diesel expansion plans extensively.

Maruti Suzuki India is investing Rs10 billion ($200 million) in a diesel-engine plant with annual capacity of 100,000 units. The funding may be increased later.

But, as Maruti Suzuki predominantly makes gasoline engines, Chairman R.C. Bhargava questions why gas prices are deregulated but diesel fuel is not. He is not sure how long the price disparity between the two fuels might continue.

“If there has to be a differential, the government must spell out clearly by how much and how long so that we can plan accordingly,” Bhargava says.

Half of Ford India’s and Fiat India’s models already run on diesel. General Motors India is fast-forwarding its diesel plans, while Tata and Ashok Leyland are looking to expand their diesel lineups.

Nissan, Renault and Volkswagen are building new plants capable of switching between diesel and gasoline engines.

Diesel prices are set by the government, which subsidizes oil companies’ losses to limit both the cost of transporting goods by commercial vehicles and of pumping water for farm use.

But the oil companies may charge market prices for gasoline, which is not regulated.

India’s percentage of diesel-powered vehicles has risen from 15% to 40% in the past two years, as the difference between diesel and gasoline prices keeps widening and new technologies make small diesel engines more efficient than gas-powered mills.

Auto makers and motorists benefit not only from the lower cost of diesel fuel but also from the greater efficiency of diesel engines. For example, GM India’s Beat compact diesel is 31% more fuel-efficient than its gasoline version.

But the Indian auto makers’ euphoria may prove to be short-lived if New Delhi’s Center for Science and Environment has its way. CSE is challenging the diesel push on the grounds of deteriorating air quality.

According to CSE, the availability of inexpensive fuel is spurring the sale of diesel cars, posing a threat to public health. Emissions data show diesel cars on average emit seven times more particulate matter and three to five times more oxides of nitrogen than do gasoline cars.

Diesel cars, however, are legally allowed to emit three times more NOx and several times more particulate matter in India.

“It is clear that even what (the) Indian industry calls 'clean diesel' is far from clean in terms of toxicity,” says Anumita Roychowdhury, CSE’s executive director.

Auto makers say vehicles and utilities use only 2% of the diesel fuel consumed in India. But a planning commission report two years ago pegged the auto industry’s use of diesel at 15%. CSE now says it is 40%.

Sunita  Narain, CSE director general, is leading a campaign emphasizing that transportation planning should focus on people, not vehicles or fuels. She says 90% of traffic consists of cars and 2-wheelers that carry only 15% of commuters, while 2% of traffic consists of buses carrying 60% of people.

If the environmentalists’movement catches on, India’s auto makers stepping up diesel production likely face further risks.