Slowing diesel consumption spells good news

With green energy, sustainable growth, climate change, etc., taking centre-stage, the seemingly insatiable demand for fossil fuel among Indians has been causing considerable problems to policymakers.

But not all is gloom and doom. A businessline analysis of the trends in consumption of petroleum products between 2010-11 to 2022-23 shows that Indians are gradually reducing their off-take of petroleum products including diesel, petrol, LPG, naphtha, and pet coke. The compounded annual growth rate in petroleum products was 3.9 per cent in this period, far lower than the rate at which the economy grew.

Within the petroleum products basket, demand for petrol continues to be quite brisk as the number of passenger vehicles on the roads keeps moving higher. Petrol consumption grew at an average rate of 7.8 per cent a year during 2010-11 to 2022-23. But petrol accounts for only 15.1 per cent of the total consumption of petroleum products. It is heartening to note that diesel, which has 38 per cent share, is growing at a far slower 3.03 per cent.

Policymakers need to heed this slowdown and do all they can to encourage this.

The slowdown

Lot of commentary is focused on the continued growth in consumption of petroleum products, but the annual growth has been quite weak, under 6 per cent in most years, as the table shows.  

The growth of over 10 per cent in FY23 was the highest in seven years and driven by heightened activity as the economy moved back to normalcy after the pandemic. But the nine-month data for 2023-24 indicates that the yearly increase could be under 5 per cent once again this fiscal year.

The growth in petroleum products consumption of 3.9 per cent between FY11 and FY23 is below the average GDP growth rate in this period, of 5.9 per cent. This roughly implies that decent economic growth can now be achieved with lower consumption of petroleum products.

An analysis of the consumption in two of the major categories of petroleum products — diesel and petrol — shows that the demand for petrol was quite strong with double-digit growth in many years since 2010-11. The annual growth in petrol consumption in the period between FY03 and FY10 was also similarly elevated at 7.8 per cent.

But the growth in diesel consumption has been decelerating. While the annual average growth in diesel consumption was 6.3 per cent between FY03 and FY10, the growth rate fell to 3.03 per cent in the period between FY11 and FY23.

Diesel offtake slows

The continued buoyancy in consumption of petrol since 2010-11 is not surprising. According to a survey done by Nielsen for PPAC, two- and three-wheelers consumed 64 per cent of the total petrol sold in India. Passenger cars and utility vehicles such as SUVs accounted for most of the remaining share. As urban consumption stayed strong over the past decade, led by increasing pay packets in the services sector, the number of passenger vehicles on the road have also been going up. The infrastructure bottlenecks in the cities and the long hours spent by vehicles in heavy traffic have been pushing up petrol consumption further.

But the consumers of diesel are concentrated in the transportation, agriculture and industrial sectors. Of the three, there has been a marked reduction in diesel consumption in the transportation sector in recent years. This sector has the largest share of diesel offtake with trucks, heavy and light commercial vehicles and buses consuming around 37 per cent of the diesel sold. The transportation segment has benefited from the massive improvement in road infrastructure and through the construction of additional State and national highways over the last decade. Better roads have made movement much faster, thus reducing diesel used. Two, the introduction of GST since 2017 has meant end of octroi which resulted in long waits at check-posts. According to government data, there is 33 per cent improvement in transport time after GST implementation.

Commercial passenger vehicles which ply on highways too would have benefited likewise; this segment accounts for 9 per cent of total diesel consumption.

Increased automation and improvement in manufacturing process would have led to reduction in industrial diesel consumption which accounts for 17 per cent share. Diesel used in agriculture for running tractors and pump sets is, however, unlikely to have moved lower, given the sluggish adoption of solar powered pump sets by farmers and the slower village roads.

The increase in the number of electric vehicles on the road is unlikely to have made much of a difference to petrol and diesel consumption since their share in overall automobiles on the road is quite low. But as the number of EVs, especially for mass transport, increases they will also begin contributing to bringing down diesel consumption in the country.

What does it mean?

Reduction in diesel consumption spells good news for policymakers as it will have an impact on the amount of crude oil imported into the country. Numbers show that crude oil imports into India grew at an average of 2.3 per cent between 2010-11 to and 2022-23. If the oil bill reduces, it will go a long way towards improving our trade balance besides giving a boost to the rupee.

Lesser operating cost for the transportation sector, with reduction in diesel consumption, will have a cascading effect on all the prices in the economy, aiding in checking inflation. Companies will gain from lower fuel cost in transporting raw materials and finished products. They will also benefit from lower cost on raw materials. Lower prices in the economy will help the common man prune his monthly budget.

As far as policymaking goes, these numbers should encourage greater thrust towards incentivising a shift to electric vehicles, especially by the transportation sector. There should be more subsidies, incentive for scrapping older vehicles, interest subvention on loans for purchasing EVs, and so on. Setting up charging stations should be done on a war footing as that is key for facilitating the shift. More effective implementation of the PM KUSUM project and continued focus on improving road infrastructure will also help.

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