Reddy last week wrote to Mukherjee saying the huge Rs 30.25 a litre difference in price of petrol and diesel had led to abnormal growth of sale of diesel cars.
Sources said the letter pointed out that while a litre of petrol in Delhi costs Rs 71.16 a litre, the price of a litre of diesel is Rs 40.91.
Besides, there was Rs 12.72 a litre differential in rate of excise duty on the two fuels - petrol attracting an excise duty of Rs 14.78 per litre while diesel being charged at just Rs 2.06 a litre.
Together with the Rs 12.53 a litre subsidy on diesel, the differential between petrol and diesel comes to Rs 25.75 a litre, Reddy wrote.
Considering a mileage of 18 per litre for small diesel cars and 12 a litre for medium-sized cars, the benefit extended to these cars works out to Rs 1.70 lakh per small car and Rs 2.55 lakh per car of medium size.
It has argued that the rich should not get subsidised fuel. According to Oil Ministry estimates, 15 percent of diesel consumption is accounted for by personal cars and SUVs.
Sources said Reddy was of the opinion that an additional excise duty of Rs 80,000 per car would not suffice and a higher excise duty needs to be levied to bring parity between the two fuels.
He also pointed out that because of the price differential diesel consumption grew by 7.2 percent in 2011-12 compared to 6.2 percent growth rate in 2010-11. In comparison, growth in petrol sales declined from 10.7 percent in 2010-11 to 5.6 percent in 2011-12.
Such a sharp increase in consumption of diesel as compared to petrol over last one year was due to the large subsidy on diesel, he said adding the subsidy on diesel alone is expected to increase from Rs 81,192 crore in 2011-12 to over Rs 100,000 crore in 2012-13 at current prices.
The Oil Ministry argues that the additional amount garnered from the higher excise duty can be used to make good a part of the subsidy on diesel.
The higher duty would also prevent "dieselisation" of the economy, it has been reasoned.
The Kirit Parikh Committee on energy in 2010 had also suggested a one-time additional excise duty of Rs 80,000 on diesel cars, arguing that it would offset the higher excise duty on petrol.
Petrol cars up to 4 metres long and with 1,200-cc engine capacity and diesel cars up to 4 metres long with a 1,500-cc engine capacity attract 12 percent excise duty.
In addition, petrol cars longer than 4 metres and with an engine capacity above 1,200-cc and diesel cars more than 4 metres in length and with an engine capacity above 1,500-cc attract excise duty at the rate of 22 percent, plus Rs 15,000.
Diesel is the most consumed fuel in the country but is sold at a discount to its imported cost. The current diesel subsidy is Rs 12.53 per litre and on an annualised basis, these amounts to Rs 100,000 crore out of the total fuel subsidy, estimated at Rs 178,498 crore in the current fiscal.