Petrol price hike: Not again!

Car owners, brace yourselves, because oil marketing companies are planning to raise petrol prices by about Rs 1.82 soon. Why? Because their poor financial situation demands an increase in prices, they say. Both Bharat Petroleum Corporation and Hindustan Petroleum Corporation posted net losses for the quarter ending September.

The proposed hike comes just after petrol prices were increased by about Rs 3.14 per litre in mid-September.

What impact will this have on car buyers, especially at a time of high interest rates?

[caption id=“attachment_121203” align=“alignleft” width=“380” caption=“The hike will accelerate demand for diesel-engine cars. AFP”]  [/caption]

One, it will further increase the cost of owning a petrol-engine car. A recent Crisil Research note said that because of frequent increases in fuel prices and interest rates, the cost of owning a car had risen by a steep 12-14 percent over the past 19 months. Petrol prices have jumped by 37 percent since the transport fuel’s prices were de-regulated in June 2010, while the central bank has raised rates 13 times since March 2010. Another petrol price hike will just remind potential car buyers why it was such a good idea not to make a purchase in the first place.

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Two, it will accelerate demand for diesel-engine cars. Because of the more than 43 percent difference in the prices of petrol and diesel (diesel is still subsidised by the government), in recent times, more consumers have been opting for diesel-engine variants of several car models when they decide to buy a car. Indeed, demand is so high that there are long waiting lists for the delivery of many diesel-engine car models. Some companies like General Motors have even s topped producing petrol-engine cars at its plants after demand for its diesel cars increased. German auto maker Volkswagen has also launched only the diesel variant of its Jetta and Passat models.

Diesel-engine cars account for a little over 30 percent of the car market, and if the diesel subsidy continues, some experts believe diesel cars could grab up to half the car market in about four years.

Three, it will keep demand subdued in the overall car market, primarily because petrol-engine cars dominate sales. Car sales plunged to their lowest level in October, despite the festival season being in full swing. A fractious labour-management dispute at Maruti Suzuki, India’s largest car-maker, caused its sales to dive by 53 percent from a year ago, while Hyundai Motor India, the second-largest car-maker, also reported a drop in sales.

Despite a slew of car launches, consumers have been wary of shopping for cars, 80 percent of which are funded by loans. Industry experts now expect car sales to report an anaemic 2-4 percent growth this year, after last year’s sizzling 30 percent jump. This, despite car-makers offering a slew of discounts and other incentives in recent months to lure buyers.

Four, it will continue to crank up the pressure on inflation. True, a petrol price hike does not have as big an impact on inflation as a diesel price hike (diesel is more widely used by trucks and power generation, which feed into overall prices), but when wholesale inflation is already hovering close to double-digits, every single price movement counts.

The earlier Rs 3.14 hike in petrol prices was estimated to have added about 7 basis points to inflation (100 basis points make 1 percentage point). A similar increase in diesel prices, in contrast, would have added about 42 basis points to inflation, according to experts. Seven basis points might seem like nothing when inflation is at 5 percent, but it can still have a troubling impact when the wholesale price index is at 9.7 percent.

Let’s also not forget that this may not be the only price hike in store. It’s becoming clear that power tariffs will also need to be hiked, and significantly at that. Incremental hikes in different areas will add to one large chunk of inflationary pressure. That does not make the Reserve Bank of India’s job of bringing down inflation through interest rate hikes any easier.