Hindustan Motors rolled out the Mark 4, the first diesel car in India, in 1979. It was powered by a 1,489-cc 37 bhp engine and was extremely well received by buyers. Thirty-four years later, India has as many as 449 diesel (and 429 petrol) variants on the road–a clear indication of how diesel cars have become the preferred mode of transport in the country. Over 53 per cent of passenger vehicles sold across India in the last fiscal were powered by diesel. Among utility vehicles, 5,39,000 of the total 5,54,000 units sold in the country in 2012-13 were diesel, according to the Society of Indian Automobile Manufacturers (SIAM). The segment grew by about 35 per cent last year, while the petrol segment shrunk by 15 per cent. Not surprising, given the lower cost of diesel and the fact that the cars are considered more fuel-efficient than petrol ones.
Or so, everyone thought.
In the last year—with the government subsidy being slowly reduced(40 paise per month starting January 2013)–diesel prices have begun inching closer to that of petrol, which is becoming cheaper owing to a softening of global crude prices. We’ve seen diesel prices going from Rs 41.29 (on June 18, 2012) to Rs 48.67 (on April 16, 2013) while petrol prices have dropped from Rs 70.24 a litre to Rs 66.89 over the same period. In Goa, where diesel costs Rs 52.70, it’s overtaken petrol, at Rs 52.10.
The state of the Indian auto sector, which is currently plagued by high input costs, enhanced interest rates and a lack of customer interest, doesn’t help–although in this case, both diesel and petrol car sales are affected.
According to sources, auto companies are going slow with their plans for fresh investment in diesel engines plants. India’s leading auto maker Maruti Suzuki, which has bought land in Becharji in Gujarat, is yet to decide whether the plant will manufacture diesel or petrol engines. Similarly, India’s second-largest car-maker Hyundai Motors, which was planning a second plant in Chennai at an estimated investment of $300 million, is now contemplating a “flexi-plant” which can produce both diesel and petrol engines instead of instead of a totally diesel plant.
Jnaneswar Sen, senior vice-president, marketing and sales of Honda Cars India, which has just entered the diesel segment with Amaze, says: “In the current environment, when diesel and petrol are being aligned with market rates, we expect the choice of fuel to be determined by the customer on the basis of his usage requirements.” The Japanese carmaker, which started Indian operations in 1995, registered a 35 per cent growth rate last fiscal. Amaze is its first diesel model in India.
Dr Pawan Goenka, president, Automotive Division of Mahindra & Mahindra, which makes only diesel vehicles, says: “The auto industry is faced with a situation where not only has the excise on SUVs increased but diesel prices too have gone up. This could have an impact on sales of diesel SUVs. The petrol-diesel price differential is currently 26 per cent, compared to 42 per cent a year ago. We have been saying for a while now that diesel price should be freed but this is happening at a time when the excise duty has also gone up. This is a double whammy.”
With 41,432 units, M&M saw a year-on-year increase of only 1.76 per cent in April. It is now taking stock to ensure that its bottomline remains healthy.
On the new situation, RC Bhargava, chairman of Maruti Suzuki India, says: “Naturally the sale of diesel cars will go down and the percentage of petrol cars will increase. There could be a minor correction in growth rate, but the share of diesel vehicles will not see any drastic downfall from their current levels.”
India’s largest car-making company, Maruti was known to be set to invest Rs 1,700 crore to increase its diesel engine manufacturing capacity by 75 per cent over the next two years. At the moment, diesel accounts for 38 per cent of the company’s cumulative sales. Asked if Maruti would now scale down production of its diesel variants, Bhargava says: “We manufacture cars as per market demand and can alter production as per market requirement.”
Luxury car maker Mercedes Benz India, 80 per cent of whose cars are diesel, claims not to be worried. Asserting their two-tier focus, MD & CEO Eberhard Kern says: “There may be a slight impact but we are not seeing any particular shift in customers enquiries about petrol over diesel.”
Tata Motors, which has 43 diesel and 22 petrol cars in its portfolio, says it is developing both petrol and diesel variants. “We are developing engines based on both conventional fuels (diesel and petrol) and alternate technologies, like CNG and hybrid. We strongly believe that diesel has to be among the bouquet of fuel choices, because it is a fuel for the future in being highly cost effective and therefore environment-friendly,” says a Tata spokesperson.
Not everyone is equally blasé. Joginder Singh, president and MD of Ford India, says: “We have seen a progressive shift in demand for petrol-powered vehicles. We are waiting to see how this develops over a period of time.”
Gaurish Sakhardande, GM, Sales & Marketing for Goa-based Sharayu Toyota, says, “There has been considerable impact on customer preference and enquiries due to the changes. Our dealership, which had a share of 60-40 in favour of diesel a year ago, has now moved to 70-30 in favour of petrol.”
Sugato Sen, deputy director-general of SIAM, disagrees that there is a shift but concedes that “there is some concern regarding diesel cars which are priced higher than petrol variants”.
Sen says diesel cars have evolved from being perceived as high maintenance to being more cost-effective and this will ensured that they stay in demand. “Diesel will always remain the first choice for long-distance travel,” he says.
However the car scenario pans out, the oil marketing companies are probably the most relieved. With the subsidy on diesel being cut, they are losing Rs 3.73 per litre currently, down from Rs 10 per litre last fiscal.
The spokesperson for the Ministry of Petroleum and Natural Gas, the nodal ministry for all oil companies, says: “Starting January this year, the government allowed oil marketing companies to raise the pump price of diesel by 45 paise a litre, excluding taxes. This will be the general trend every month until the pump price reflects the market rate.”
He added: “If crude prices firm up (as fuel prices are based on international crude oil prices) then we could take some more months to wipe off the subsidy on diesel. The government is monitoring the situation closely.”