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The Dieselization of the Indian Car Market: Should India Continue to Subsidize Diesel Fuel?

Principal Investigator(s): 


Investigators: Randy Chugh, Maureen Cropper and Urvashi Narain

The Indian government is currently contemplating fuel economy standards to reduce fuel consumption and foreign oil dependence.  At the same time, the government subsidizes diesel fuel, which currently sells for 30% less than gasoline.  This has led to the dieselization of the Indian car market: the share of diesel cars in new car sales has risen from 23 percent in 2002 to 40 percent in 2010.  Diesel cars are driven almost twice as far as gasoline vehicles and, given, current emissions standards, are far more polluting.  This has given rise to suggestions that diesel cars be taxed.  In this paper we compare the welfare costs of reducing diesel fuel consumption via a tax on diesel cars v. a tax on diesel fuel.  
Using household-level data on vehicle purchase and driving distance from the JD Power APEAL survey, we estimate a model to explain which vehicle a household buys and how far they drive it.  We estimate that eliminating the diesel subsidy would reduce the market share of diesel cars from 32 percent to 28 percent.  A diesel car tax of 20 percent would achieve the same result. The diesel car tax option, however, provides little incentive to reduce miles driven for households that continue to purchase diesel vehicles: the car tax reduces diesel fuel consumption by only 12 percent while eliminating the diesel fuel subsidy reduces diesel fuel consumption by 30 percent.  In addition to being less effective, the diesel car tax option is more costly in terms of consumer welfare.
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