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Oil ministry is seeking hefty tax increase for diesel-fired generators and vehicles  

NEW DELHI: Alarmed by the galloping growth in diesel demand even as consumers and even factories are switching to the lowpriced fuel, the oil ministry is seeking a hefty tax increase for diesel-fired generators and vehicles, and pushing for higher pump price for the fuel.

The government has raised diesel prices by barely 2% since June last year while the price of petrol has climbed 30%. The oil ministry's tight control on diesel has made the fuel even cheaper than furnace oil, a low-grade industrial fuel luring factories to switch to the transportation fuel, and severely distorting India's fuel basket.

Diesel demand rose nearly 10% in September. In the first half of the fiscal year, it has grown faster than petrol for the first time after six years. Indian refineries are struggling to keep pace with the change in the demand pattern as oil companies have designed their plants keeping in mind the traditional fuel use pattern, in which diesel accounted for about a third of the country's total fuel demand.

The share of diesel in India's total oil consumption has soared to 43% in the current fiscal year from 35% five years ago while petrol's share has risen from 8% to 10%. In developed countries, diesel's share is 27% while petrol is 32%.

Oil minister Jaipal Reddy met finance minister Pranab Mukherjee on Wednesday to discuss the deteriorating financial health of state oil companies. Oil companies are waiting for the finance ministry to partly reimburse them for losses from selling underpriced fuel. Reddy told reporters that he had sought a meeting of the Empowered Group of Ministers on fuel prices.

Oil ministry officials say they are concerned that the gap between diesel and petrol prices has widened to Rs 26 per litre from about Rs 11 in June last year. The growing gap is making diesel more attractive for customers.

The shift in demand towards diesel began with customers queuing up for diesel cars despite a long waiting period for many models. What is worrying oil industry executives and officials is the growing use of diesel by industries.

"It is reported in the industry circle that some amount of diesel could substitute fuel oil due to the price factor," according to a report of the oil ministry's Petroleum Planning and Analysis Cell (PPAC). Prices of diesel, after adjusting for the fuel's higher calorific value, are higher than furnace oil, also called fuel oil, almost everywhere in the world except in India, where the transport fuel has been cheaper since April this year.

"Since calorific value of diesel is higher than fuel oil and it is a cleaner fuel, it makes economic sense for consumers to switch over to diesel from fuel oil whenever price is favourable," the report said. This is reflected in fuel demand data. In sharp contrast to the surge in diesel sales, fuel oil sales have fallen 15.3% in April-September. "The trend is likely to continue for sometime," PPAC said.

One executive in BPCL said that "dieselisation" of economy is evident from sales figures. Company's furnace oil sales have dropped by 39% and Naphtha by 16% in the second quarter ended September 30, whereas diesel sales rose by 10% in the same period. The oil ministry shares the concerns of state refiners. "Due to dieselisation of the economy, we have asked the finance ministry to impose taxes on diesel vehicles and gen-sets," an oil ministry official, who did not wish to be named, said.

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