There is a clear need to reduce the subsidy provided to different classes of vehicles at the point of consumption rather that at the time of purchase
Problem Statement
 

Government finances are troubled.  Subsidy burden is proving a drag on the overall fiscal situation.  Fuel subsidy arising out of a wide gap between economic cost and price is straining balance sheets of oil companies and consequently the government.  Within the pool of fuel subsidy, diesel pricing has been kept artificially low to buffer the impact of global diesel price escalation to economically backward parts of the society.

This deliberate mis-pricing to accommodate the weaker sections of the society is resulting in a perverse subsidy to affluent consumers who are increasingly switching to diesel-powered vehicles across the price range—from an entry-level compact all the way to high-end imported SUVs.  In order to recoup or arrest the trend of a switch towards diesel cars (to partake of the fuel mis-pricing), the government has repeatedly tried to increase the upfront duty/tax/levy at the point of purchase of these vehicles. This promotes a clear fiscal mismatch through inadequate upfront revenues (in the year of vehicle purchase) and continued stream of subsidy outgo for the government for the next 15 odd years (especially in the era of consistently rising dollar price for fuel and the consistently depreciating rupee).  These measures have clearly not proven successful as the switching continues unabated leading to increased fuel subsidy burden in future years. 

There is thus a need to stanch the bleeding through a more targeted diesel subsidy that will meet both the fiscal and societal needs. The government has ideated and failed in bringing about a dual price regime for diesel and has indicated helplessness in addressing the same. 

Suggestion

There is thus a clear need to reduce the subsidy provided to different classes of vehicles at the point of consumption rather that at the time of purchase. It has proven near impossible to introduce dual priced diesel at the gas pump in a viable manner so that affluent consumers pay near full prices while there is a scaled increase in diesel subsidy for other classes of consumers.

My suggestion to tackle this dilemma is to switch the point of collection away from fuel pumps to another party.  The suggested collection agent for the diesel fuel subsidy is the insurance company.  Every vehicle in India is mandated to compulsorily have a third party insurance renewed every year. The government could introduce a diesel fuel adjustment tax based on a normative usage of a vehicle (say 10,000 km per annum) multiplied by the potential fuel subsidy (say Rs.10 per  litre) adjusted for fuel efficiency. A simple table can be created using the above parameters to arrive at a normative annual subsidy burden for each vehicle type. The government can also decide to have a sliding scale of subsidy on some of these vehicles over the higher-end model. This provides sufficient flexibility to the government to direct the tax and amount thereof to a specific segment/sub-segment of the vehicle population. 

Insurance companies can also prove to be efficient and easily manageable/assessable entities for the tax collection exercise. This could also be introduced in a staggered manner beginning with the higher end luxury vehicles being brought into the ambit for the first year, with progressively larger number of vehicles coming into the ambit over subsequent years.

Conclusion

The above suggestion of collecting diesel subsidies on vehicle owners at the time of annual insurance premium has the following advantages

1. This would lead to specific well directed revenue collection
2. This would reduce the perverse incentives given to certain class of diesel subsidy consumers
3. This would better align government revenues and costs away from one-time, upfront revenues to match the recurring costs
4. Insurance companies would prove to be efficient agencies to act as the collection agents for the government
5. This can be introduced in a non-disruptive manner beginning with full subsidy collection on high-end luxury diesel vehicles and progressively embracing other classes and types of vehicles.