The economy might be growing 5 per cent a year, but India's consumption of diesel has shrunk 4 per cent in each of the last three years.

Sales of diesel, which climbed from 28.3 million tonnes in 1994-95 to 39.3 million tonnes in 1999-00 -- an annual compound growth of 7 per cent -- fell to 37.9 million tonnes the next year, and to 36.5 million tonnes in 2001-02.

This, oil industry experts say, is primarily due to large-scale substitution and adulteration of diesel with the vastly cheaper kerosene.

In Moti Khavdi in Jamnagar, for instance, privately owned dispensing units openly sell kerosene to  truckers who use it in place of diesel.

The kerosene sold is both imported as well as that diverted from the rationed market. Reports suggest as much as 40 per cent of the rationed kerosene is diverted.

Oil refining companies Indian Oil Corporation and Hindustan Petroleum Corporation have complained to the Union petroleum ministry and the Gujarat government but action is yet to be taken.

Last year, diesel consumption in Gujarat, Madhya Pradesh and Maharashtra fell 6.6 per cent, while rising 1 per cent in the northern states.

This year, consumption in the west fell 5.5 per cent while rising 4 per cent in the north despite Delhi switching to compressed natural gas for public transport.

The loss to the exchequer adds up to Rs 1,800 crore (Rs 18 billion) a year. At a conservative estimate of 4 per cent growth, diesel sales this year should be around 44 million tonnes, instead of the 37-38 million tonnes expected by the end of March. This is unreported consumption of 7 million tonnes.

The sales tax on kerosene is 8-10 per cent lower than that on diesel across states, and the excise duty is 6 per cent lower, which makes substitution lucrative.

And, if the kerosene used is from rationed stocks, where the price is Rs 9 a litre, the money to be made is significantly higher.

The incentive to mix kerosene in diesel is bigger in Gujarat and Maharashtra. While diesel attracts a sales tax of 18 per cent in Gujarat, kerosene sales are exempt.

In Maharashtra, there is a 38.14 per cent sales tax on diesel against 4 per cent on kerosene. In Punjab, by contrast, the sales tax on diesel is just 8 per cent while that on kerosene 20 per cent.

At an average diesel price of Rs 16 a litre, and an average sales tax differential of 8 percentage points between kerosene and diesel, the state governments lose Rs 900 crore (Rs 9 billion). In excise, the loss works out marginally lower, at Rs 850 crore (Rs 8.5 billion).