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News18 » Auto
3-min read

India's Diesel Demand Set for Detour as Drivers Switch to Gasoline

The auto sector also expects diesel to struggle. Maruti Suzuki India Ltd, India's biggest automaker, will stop making diesel cars next fiscal year, blaming uncertain fuel prices and stricter emission standards.


Updated:July 15, 2019, 4:15 PM IST
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India's Diesel Demand Set for Detour as Drivers Switch to Gasoline
A worker fills a car with diesel at a fuel station in Jammu August 29, 2013. (Image: REUTERS/Mukesh Gupta/File Photo)

India's strong diesel demand growth is decoupling from the car market as motorists increasingly turn to gasoline vehicles, leaving it more reliant on patchy demand from construction and heavy industry.

A slowdown in demand growth in India, one of Asia's biggest diesel guzzlers, could add to a persistent glut of diesel in the region, fuelled in part by strong exports from China, and put pressure on regional refining profit margins.

Transportation has historically accounted for two-thirds of India's diesel use, but a steady decline in diesel's discount to gasoline has seen sales of diesel-powered cars fall to a record low share of total sales, according to industry body Society of Indian Automobile Manufacturers (SIAM).

This diminishing draw from autos means diesel demand growth in Asia's third-largest economy could now depend mainly on government and company infrastructure spending, rather than daily use by an increasingly mobile population.

India's economy grew at its slowest pace in more than four years in the March quarter and the risk of a wider fiscal deficit threatens government spending as private investment falls, leaving the outlook for construction activity appears uncertain over the near to medium term.

The largest drivers of diesel demand growth in India are commercial vehicles including trucks and public transport, where consumption is linked to the overall economy, followed by passenger vehicles, said K Ravichandran, senior vice president at ICRA, a unit of Moody's Investors Service.

"India's diesel demand growth will largely depend on the performance of the economy, now that diesel passenger vehicles have become less glamorous as the price differential with petrol is coming down," Ravichandran said.

Gear Shift

Diesel-powered cars accounted for 19% of total car sales in India in the 2018/19 financial year, compared with nearly 50% of sales in 2012/13, according to SIAM.

That drop in diesel-fuelled auto sales in turn contributed to slower diesel consumption growth, from roughly 7% annually from 2010 through 2013, to 3% for 2018-19, according to data from the Ministry of Petroleum & Natural gas.

Industry executives expect diesel sales to continue to struggle as diesel's historical price advantage to gasoline diminishes. In 2010, diesel traded at a roughly 23 rupees ($0.33) per litre discount to gasoline, but is now less than 7 rupees cheaper, according Petroleum Planning and Analysis Cell, a think-tank attached to the federal oil ministry.

"The motivation for owning a diesel vehicle is basically the pricing. With that price differential reducing, there is going to be a preference for petrol vehicles," said M K Surana, the chairman of India's third largest state refiner Hindustan Petroleum Corp Ltd

Surana expects diesel demand to grow 2.5%-3% in 2019/20, below the India's petroleum ministry's initial projections of 3.5%.

The auto sector also expects diesel to struggle. Maruti Suzuki India Ltd, India's biggest automaker, will stop making diesel cars next fiscal year, blaming uncertain fuel prices and stricter emission standards.

Mahindra and Mahindra Ltd, India's third largest automaker, plans to stop production of some diesel vehicles. Beyond diesel, India's overall auto sales have been sluggish, recording the slowest pace of growth in four years in 2018-19, according to SIAM.

Farm Sector Slowdown

At the same time, a renewables push across the farm sector could cut diesel use in irrigation pumps if the government follows through on plans to boost solar generation capacity.

In February, India approved subsidised sales of solar pumps to millions of farmers, which it expects will cut diesel demand by about 1.1 million tonnes a year. The country consumed 83.5 million tonnes of diesel in 2018/19.

The government's ambitious target for electric vehicles to make up 30 percent of auto sales by 2030 may also dent diesel demand.

Still, over the longer term India's overall growth trajectory is expected to underpin fuel demand.

"Strong economic momentum should support industrial/freight activities, providing further impetus to long-term gasoil demand growth," said Sri Paravaikkarasu, director at Singapore-based consultancy FGE.

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