Subsidy is one of the most tricky problems that any policy maker faces, especially in a democratic welfare state where no single party has absolute majority. However, at the same time, they cause some major distortions that may not be visible overtly, but seriously impact the economy not only at the macro level, but also at the micro - level. The present paper specifically looks into diesel subsidy and its impact upon the diesel car industry. The time period chosen for the paper is June 2010 till April 2013. The paper is basically only a theoretical modeling paper and some of the conditions discussed may be hypothetical, but they do help in establishing the boundaries. However, it is to be noted that some data has been used to provide justification for the article. Overall, it was observed that in every scenario, imposition of excise duty on diesel cars somewhere stood justified.

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