Budget 2012: Diesel cars to get more expensive?

Over the past few months, as we in Business Today have written about repeatedly, there has been a dramatic shift of consumer preference towards diesel-powered vehicles. The shift has been particularly noticeable in sales of vehicles for which there are both diesel and petrol options available. The demand is so skewed that in some cases it is above 85 per cent of total demand for that vehicle.

Take for example the new Maruti Swift, which has been on the market for six months. There is a two-month waitlist for petrol-engined Swifts but buyers of the diesel variant have to wait over six months.

This forced the country's largest carmaker to sign a deal with Fiat to supply 100,000 engines annually to them for the next three years. The Swift uses a license-built model of a 1.2 Diesel engine designed by Fiat that is also used in the Tata Indica Vista and the Fiat Grande Punto. And Renault did not even bother putting a petrol engine on its new Pulse (a badge-engineered Nissan Micra), fitting it with their 1.5 dCi Diesel engine.

This trend has translated into increased sales of diesel at fuel pumps. Given that diesel is subsidised, the rising consumption has raised heckles in the government and among environmentalists (but more on that later).

There has been a vociferous campaign by activists and some within the finance ministry to raise prices of diesel cars either by removing the excise benefit small diesel cars receive or imposing a Rs 80,000 'Diesel Tax' on all vehicles powered by the heavier fuel in the upcoming Budget.

The auto industry through its lobby group - the Society of Indian Automotive Manufacturers (SIAM) - is fighting any such measure tooth and nail.

Arvind Saxena, the Vice-President of Sales and Marketing at Hyundai India, says that the government should have a clear policy. "You have to understand that diesel is not just getting popular in India, this is a worldwide phenomenon."


In fact, in Europe, high-efficiency diesel cars are proven to be more environmentally friendly in life-cycle terms that hybrid or pure electric vehicles - the Volkswagen 'BlueMotion' diesel vehicles emitting lower carbon dioxide than the outgoing Toyota Prius.

The fact remains that diesel cars already cost a lot more than petrol vehicles but are still attracting heavy demand. In the last round of price increases, manufacturers saw this and increased prices for diesel cars a lot more than for their petrol powered brethren.

But even with a Rs 1,20,000 price differential between similarly specified petrol and diesel variants (of a small car or entry-level sedan), a car buyer who drives around 1000-1200 kilometers a month will make up the differential in just under three years.

There are some additional maintenance costs for diesel-powered cars but with modern injection diesel cars, there is no major engine overhaul required for a long time.

So even if the price of a diesel vehicle goes up by Rs 80,000 to Rs 2 lakh, the differential would be made up by an average user in about five years, which makes it a touch-and-go decision, after all the upfront cost of a petrol car is so much less.

But if you end up driving 1,500 kilometers plus every month in a small car, you will make up the difference in just over three years (versus two right now).

Of course, the smart thing to do is to buy a diesel car before April 1, 2012, when the new proposed duties kick in. But getting delivery of a diesel car before that is almost as impossible as India winning a Test match abroad.