Fuel drives choice of car!

While trying to understand the pattern of car purchases in India, the reasons behind the choice between diesel and petrol models have always been interesting to observe.

Savings on account of fuel costs, especially in the current context of runaway oil prices, is usually the primary rational argument for a majority of buying decisions.

However, purchasing a car, being an emotional decision in many cases, also depends on many other variables such as design, quality, brand preference and general feel of the vehicle.

Purchase decisions also often tend to rely on misconceptions about a certain technology — customers tend to choose petrol cars because of the belief that diesel engines are dirtier and louder, or noisier. However, this is not to say that all buying decisions are irrational or uninformed.

A paper by Randy Chugh, Maureen Cropper and Urvashi Narain on ‘ The Cost of Fuel Economy in the Indian Passenger Vehicle Market ' ( http://www.nber.org/papers/w16987 ), examines how fuel consumption of vehicles and the higher price a customer pays for more efficient vehicles ultimately affects buying decisions. It is known that diesel twins (a car model that is also available with a diesel engine, besides a petrol one) are usually more expensive to buy than petrol variants.

This is because the diesel engine technology is more complicated and requires thicker metal castings in the engine.

This leads to more weight and increased wear and tear of other car parts, thereby resulting in higher repair/overhaul costs.

BENEFITS OF DIESEL

But the benefits of diesel are many, the primary one being that they are, in general, 20-30 per cent more fuel efficient than petrol engines.

They also put out more torque (which leads to increased initial acceleration). But the benefit of higher engine fuel efficiency and lower cost of the fuel is only relevant, depending on the vehicle use pattern.

As with any machine, cars depreciate in value over time and the owner incurs periodic expenses on maintenance. So, the cost benefit of owning a diesel twin becomes relevant only when one drives over 30 km a day, on an average (average daily driving cycle in India is 35 km).

For buyers who keep the car parked at home most days of the week, a petrol twin, with a lower initial price, is the more cost-effective option.

Lately, the argument for a diesel car purchase has grown stronger, with the de-regulation of petrol prices by the Government last June. Interestingly, the paper has not taken this point into account.

With petrol prices now linked to international market rates of crude oil (India imports 75 per cent of its oil requirements), a litre of petrol is now costlier than diesel by more than Rs 25.

According to the prices published by state-owned oil marketing firm Indian Oil, petrol in Delhi sells for Rs 63.37, while diesel is priced at Rs 37.75. This large gap in pricing is because the Government continues to subsidise diesel prices (also kerosene and LPG) because it is one of the main fuels used by both the agricultural sector and also for commercial transportation.

BUYING PATTERNS

An increase in diesel prices will certainly have an inflationary impact — the prices of all food and non-food commodities will rise. Petrol, on the other hand, is mainly used for personal transport by car-owners.

Whatever the reasons for the price difference, it means that not only are diesel engines more efficient, but for every litre of petrol one can buy almost two litres of diesel.

So the benefit from making savings on the running costs, even if one pays a higher initial purchase price, increases further.

According to the paper, which has made its calculations on the basis of car and fuel prices between 2002 and 2008, diesel hatchback owners save 44 per cent of the purchase price of the vehicle over a petrol twin, while diesel sedan owners save 23 per cent.

More recent studies have also indicated that though the overall share of diesel cars in the country is around 30 per cent now, it is expected to rise to 40 per cent over the next few years, depending on the availability of diesel variants.

Buying patterns are already reflecting the same rational argument. As the availability of diesel twins for all car models increases, carmakers are witnessing a huge shift in purchases.

For Maruti Suzuki, which sells every second car in India, diesel twins account for over 70 per cent of the sales of similar petrol models.

Rival Tata Motors has an even larger share of diesel car sales, while another large domestic player, Hyundai, is building a diesel engine plant in India.

COMMENT NOW