Automakers welcome Govt initiative to deregulate diesel

Diesel prices have finally been freed which means the auto industry will no longer need to split hairs on the issue of subsidies.

Till a couple of years ago, all diesel carmakers were having a field day thanks to a generous subsidy which made the fuel a good ₹25 per litre cheaper than petrol.

It was helping nobody’s cause and the Government had to bear a burden of ₹65,000 crore annually on diesel subsidy alone.

For automakers such as Honda which only had petrol models to offer in 2012, this price differential was creating havoc in its business plans.

The company remedied this with a diesel engine for the Amaze and the new City by which time the Government also set in motion a process to deregulate diesel.

Monthly price hikes of 50 paise gradually reduced the difference with petrol and customers began weaning away from diesel cars as a result.

Now, with crude prices falling to record lows of $82/barrel from levels of $110, the Narendra Modi-regime has wisely decided to deregulate diesel.

Its price was slashed by nearly ₹3.50 per litre last week and could continue to fall in the coming weeks keeping in line with global trends. This will be equally true for petrol and the auto industry will have reason to celebrate as cheaper fuel is a good reason for customers to buy cars. Lower diesel prices may also prompt a revival in the commercial vehicle industry which has seen its worst slowdown in years with sales falling by over 20 per cent since 2012-13. The two key cost components in trucks are fuel and tyres; which, in turn, naturally implies that cheaper diesel may prompt operators to buy new vehicles.

Of course, this will have to be accompanied by growth in the manufacturing sector.

SUV makers will be relieved that with subsidies completely eliminated in diesel, the clamour for higher excise duties will now come to an end too.

For a few years now, since the time crude prices skyrocketed in 2009, a section of experts sought higher duty levies on SUVs which they claimed were making the most of subsidised diesel. This argument will no longer be valid in a deregulated scenario.

For the moment, it all looks nice and rosy thanks to low global prices.

However, there could be a possibility of crude touching levels of $100 per bbl in the coming months. Oil companies will then have no choice but to hike diesel prices too.

This, in turn, could stoke inflation and affect household budgets across the country. The essence of deregulation is that customers get to experience market prices which could go either way. And as much as they would exult with a fall, they need to be pragmatic when prices rise too.

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