Indian auto industry welcomes partial deregulation of diesel prices

Although Indian automakers welcomed a move by the government to partially deregulate diesel prices, they added that the decision could lead to higher inflation, which could ultimately hurt the auto industry. The Live Mint daily newspaper reported that starting midnight of January 18, India’s three oil marketing companies (OMCs) raised diesel fuel prices by Rs 0.45 (US$0.82) per liter for general consumers after the government allowed them to initiate minor increases in a phased manner to bring the price of the fuel in line with its cost. The government’s decision to partially deregulate diesel fuel prices is expected to lessen the huge gap between the prices of diesel fuel and gasoline.
Bulk consumers including railways, defense, and state road corporations will be required to pay an additional Rs 9 (US$0.16) per liter, which would be enough to almost wipe out the losses that oil companies incur on bulk diesel fuel sales. For every liter of diesel fuel sold in the country, oil companies have under-recoveries of Rs 9.60 (US$0.17). Under the partial deregulation, the oil companies are allowed to increase diesel fuel prices monthly in small amounts until retail prices reach the point where they cover the cost for oil distributors and marketers. Currently, diesel fuel sells at Rs 47.15 (US$0.86) per liter in New Delhi. In June 2010, gasoline (petrol) prices were deregulated, but have rarely moved in tandem with the changes in cost.
“This is a good move and may allow the OMCs to bring the price of diesel [closer] to market [rates]. This will essentially remove the distortion between diesel and petrol”, said Sugato Sen, deputy director-general of the Society of Indian Auto Manufacturers (SIAM). “All the talk of the rich getting benefited due to the subsidy on diesel will go away. Companies will not have to wait for policy [changes] to take decisions.”
SIAM is the industry association that represents automakers who derive the majority of their sales from diesel vehicles, including Tata and Mahindra & Mahindra. SIAM said the contribution of diesel cars sales to total passenger car sales in India surged to 58% last year, from 28% in 2010.
Sales of overall passenger cars in the country were weak in 2012, especially in the later half of the year. The increasing gap between diesel and gasoline prices, was cited as a cause for decreased sales which also led to trickle-down effects: The drop in gasoline-powered vehicle sales resulted in soaring inventories; although sales of diesel-run vehicles surged, production was low. These, and high inflation rates, were prominent factors behind the slow sales growth last year.
The gradual rise in diesel fuel prices will allow oil companies not only to reduce their losses; it will also help automakers rebalance their production. However, despite removing the distortion between diesel fuel and gasoline prices in a phased manner, analysts say it is unlikely that the partial deregulation will bring about a drastic change in demand for diesel-powered vehicles.
Although the new government policy is perceived to be detrimental to the sales of diesel vehicles in the long term, some say it may actually work to their benefit in the short term, because it could prompt fence sitters to make purchases now. And despite the price hikes, diesel vehicles are expected to enjoy an advantage in the Indian market because diesel engines are more efficient than gasoline engines, and the price of gasoline in India is still around 45% higher than the price of diesel fuel. The auto industry also prefers the partial deregulation to a proposal for the government to tax diesel vehicles.
Analysts say the impact on passenger car sales will be limited because the price increase will occur in small amounts every month, but bulk consumers will be the ones to shoulder the full burden immediately. And since most of India’s trucks and trains run on diesel fuel, the partial deregulation could potentially lead to a rise in inflation, which would eventually hurt the auto industry. (January 18, 2013)