The government-owned oil marketing companies' (OMCs) decision to raise ex-refinery prices of petrol by a whopping Rs 6.28 per litre on May 23 has shocked both consumers and industry. Add excise duty and State levies and the hike translates into aRs 7.5-8 (over 10 percent) increase in the price per litre of petrol, the highest so far, since fuel pricing was deregulated.
Some newspapers have described it as the petro bomb which will have carmakers in a tizzy as to how much more of a swing there will be towards diesel. The swing in the last fiscal saw carmakers scramble to rejig their production lines towards diesel even as some OEMs went all out to sell petrol cars either through discounts or clever advertising.
Expect more of that at the moment even though companies will wait and watch to see if the government rolls back the hike. The price increase is not expected to substantially lower fuel companies’ losses and with no decision on hiking diesel price (because of its political implications and the impact on inflation), so is there a way out?
In April, sales of the Maruti Alto, the choice of first-time owners, fell but it may be too early to attribute this to higher petrol prices and the excise duty levied in the Budget. Two-wheelers, typically, the Indian family’s first set of wheels, may not see an immediate impact given that buyers make cash-down purchases for them. With the festive season a few months away, expect a rash of offers to entice buyers. Buyer choices on alternative fuels – CNG and LPG – are still limited. Just under 10 percent of the Hyundai Eon’s sales are LPG while about 20 percent of the Wagon R’s sales are LPG since these fuels are available only in a handful of cities.
On Facebook, the former Maruti MD and CMD of multi-brand service solutions provider Carnation Auto, JagdishKhattar said: "While on pricing of fuel, the government needs to revise its format of subsidising petro fuels. Instead of deciding the selling price, they should inform the oil companies the amount of subsidy per litre the government will provide. On that basis, companies will fix their retail price. This will force them to improve efficiency and productivity as it will not be cost plus. It will also enable Reliance, Essar and Shell to revive their hundreds of closed pumps as they cannot sell at the price fixed by government. Consumers will benefit as they will have choice."
The OEMs have also begun to voice their opinion. Here's what a HondaSiel Cars India spokesperson had to say. “The fuel price hike is sure to impact the beleaguered automobile industry. The sentiment in the market is already low due to the tough economic conditions and the recent increase in the excise duty on all cars. This big price increase will further dampen the consumer sentiment and there is likely to be an impact on sales, and it is the common man who will feel the pinch.”
SIAM bats for a hike in diesel pricing
The Society of Indian Automobile Manufacturers (SIAM) has expressed deep concern about the impact of the steep increase in petrol prices. It says the Rs 7.50 per litre hike will not only hurt the bulk of petrol-buying consumers like two-wheeler and small car owners, but will bring back the negative sentiment in the market.
The industry body has pointed out that sales of petrol-engined cars, which are essentially in the lower end of the market, are already down due to the high price distortion between petrol and diesel; now with this record price hike, the situation will worsen. Demand for diesel cars, which has grown substantially in the past year, will only burgeon.
SIAM says there is a need to look at the petroleum product pricing policy in a comprehensive manner and remove the distortions. The need of the hour is to reduce the price hike on petrol and revise the price of diesel moderately, which will bring in more revenue to government as well as some level of parity between the two competing fuels for the automotive industry.
CRISIL: Get ready for total dieselisation
Ratings agency CRISIL has said that the higher-than-expected price hike of Rs 7.50 per litre on petrol will negatively impact consumer sentiments, leading to deferment of purchases especially in the small car segment. Consequently, CRISIL Research expects passenger car demand to grow at 10 percent in 2012-13. With a further widening in the prices of petrol and diesel, it expects passenger car demand to drift further in favour of diesel vehicles. Based on its estimates of current diesel engine capacities, the proportion of diesel cars sold is expected to increase to 42-43 percent in 2012-13 from around 39-40 percent in 2011-12.
According to CRISIL, the petrol price hike is expected to benefit the OMCs, who will not incur losses on the sale of petrol. However, CRISIL Research believes that to limit the government subsidies, a 10-15 percent increase in the prices of regulated fuels (diesel, LPG and kerosene) is more critical.
As the political clamour grows for a rollback, both carmakers and car buyers may well breathe a sigh of relief. The government has not yet bitten the bullet on diesel pricing but the empowered group of ministers is expected to do that soon.The larger question that OEMs face is how to make buyers bite the petrol bullet so that their production dynamics do not go for a toss.