With less than a month to go before a new Government takes charge in Delhi, carmakers will be hoping that a policy framework is quickly in place for diesel pricing.

In January 2013, the Congress-led UPA regime kicked off the process of hiking diesel prices by 50 paise each month as part of an exercise to gradually phase out the subsidy element which was nearly ₹14/litre. The idea was to ensure that, like petrol, diesel would get out of the Government’s administered pricing mechanism and become completely deregulated.

However, there was no hike on April 1 this year as policymakers in New Delhi referred the matter to the Election Commission. With polling underway across the country, there is going to be no hike either in the beginning of May which means that it would really be up to the new Government to continue the process of freeing diesel prices.

Falling demand It is this uncertainty ahead that is worrying both the automakers and oil companies since future investments will depend on the road ahead for diesel prices. There is still a subsidy element of ₹6/litre on the fuel which is enough to cause annual losses of at least ₹50,000 crore for the oil majors. From the viewpoint of the automobile industry, any dithering by the Government only adds to their concerns about the absence of a clear fuel pricing policy.

“If we know that diesel prices are going to be freed eventually, it will help us plan our investments better,” a top auto honcho told Business Line. Over the last year, the monthly price hikes have reduced the gap with petrol to less than ₹20/lt and prompted customers to look beyond diesel cars.

Maruti-Suzuki, for instance, has seen demand for its diesel range fall from 40 per cent in 2012-13 to 32 per cent last fiscal. Likewise, at the time of its launch last year, Honda saw its Amaze diesel version corner 82 per cent of the bookings which has since fallen to 60 per cent.

For automakers doing business in India, there are a whole lot of challenging issues to deal with unlike in most parts of the world. For a start, it is primarily a small car market where the price tag plays a big role in determining volumes. Then, there are excise duty sops for cars less than four metres long which means careful planning in product development.

The recent freeze on prices coupled with uncertainty on the new Government’s policy is cause for concern to carmakers. The move to increase diesel prices marginally each month kicked off last year despite the predictable political opposition.

It was welcome news to oil companies which were losing heavily due to the diesel subsidy. It is no secret that it was this price cushion that was resulting in rampant demand for diesel compact cars and large SUVs.

Diesel boom With a price differential of nearly ₹30/lt between petrol and diesel (₹75 to ₹45/lt) till two years ago, customers made a frenzied queue for diesel cars. Maruti and Ford, in particular, had a field day as models like the Swift and Figo sold like hot cakes. And SUV producers like Mahindra & Mahindra were not complaining either as sales soared. On the other hand, the likes of Honda Cars could only watch helplessly since they only had petrol models to offer (the Amaze had still not been launched).

For the oil companies, this lopsided consumption of diesel was nothing short of a nightmare as it fuelled losses further at the retail end. To a section of politicians and economists, SUVs were branded the villains of the script since these expensive gas-guzzlers were feasting on cheap diesel. The Government slapped a heavier excise duty on them but, clearly, this was not the solution when a price hike was the logical option.

There was no way an overnight increase of ₹10/lt could be conceived at a time when food inflation was raging and hurting the middle-class. The softer blow could come in the form of price hikes of 50 paise each month which would gradually wipe off the subsidy over a period of time.

The Government also reasoned that customers could cope better with this kind of a phase-out plan and the results began showing the desired results.

It now remains to be seen if the process of diesel price deregulation will continue in the coming months. Hopefully, sound economic reasoning will prevail over political compulsions and help both the auto industry and oil companies. It could, otherwise, turn out to be a messy no-win situation.

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