Petrol prices have been hiked, so what?

Petrol prices are up by Rs 5 per litre from today. In Bangalore, where I live, it’s Rs 71.10 per litre. I also noticed that in Delhi, even after the hike, it’s Rs 63.37 per litre. The point of this post is not to ask why the rates are different across cities. In any case, I am fine paying that premium for the pleasure of living in Bangalore. As I write this, there is a cool breeze from the window, and the terrace of my neighbour’s house is still wet from yesterday’s rains.

My question is this: Will the hike in petrol prices induce customers to pay a premium to fuel economy in cars, or at least show a preference to fuel efficient cars in the next few quarters?

The five rupees does not seem to amount to much, but it is significant, over the period of a vehicle’s life. Let’s do some quick math. Assume that your vehicle’s life is 10 years, that its mileage is 11 km a litre, and you travel 30 km a day. At a discount rate of 8%, the present value of the additional amount you would be spending because of the Rs 5 price hike will be Rs 39,460. You can easily buy an iPad with that amount. Now, assume that your car gave you only 8 km per litre - and not 11 - the difference, at the current price is a substantial Rs 1.92 lakh. ( Here’s the link to the Google sheet , in case you want to play around with the assumptions - and indeed check the calculations)

The other question is whether we are ready to pay extra for for the savings in fuel. It’s not an easy question to answer. Americans, for example, don’t, which is why environmental groups have always insisted on stringent fuel economy standards there.

But what about India? In a paper published last month (The cost of fuel economy in the Indian passenger-vehicle market), two economists from University of Maryland and one from World Bank tried to answer this question by looking at fuel prices and automobile sales data. They found no evidence to suggest that Indians undervalued fuel economy. In fact, in some cases, they overvalued it.

It’s very tempting to ask, “So what’s new?” After all, Hero Honda built its brand by asking us to fill it, shut it and forget it. But, such is the nature of the consumer market in India that what applies for two wheelers, might not apply for cars.

Still, I don’t expect automobile makers to go on overdrive and make their products more fuel efficient. But marketeers will, and project fuel efficiency as a key selling point.

And me? I have a radical idea: I am planning to buy a bicycle. (Disclosure: The result of implementing this idea last time - a rusting equipment under the staircase of my parents apartment in Chennai.)