The Diesel Car Has Run Into A Dead End In India

Maruti Suzuki India Ltd., India’s largest carmaker, will stop making diesel cars by April next year, Chairman RC Bhargava told reporters at a press conference last month. It’s best for the company to halt output, he said, given the lower fuel-cost arbitrage and an expected rise in cost of manufacturing Bharat Stage VI-compliant diesel engines.

Maruti Suzuki didn’t share an estimate of how much prices of diesel cars will rise after the new emission standards are rolled out in April 2020. But Ashwin Patil, auto analyst at LKP Securities, said initial calculations suggest the gap between the prices of a petrol and a diesel variant of the same vehicle would rise twofold—to Rs 2-3 lakh compared with Rs 1-1.25 lakh now.

The stricter emission norms come at a time when seven Indian cities ranked among the world’s 10 most polluted urban centres. In fact, air pollution in New Delhi prompted the Supreme Court to temporarily ban registration of diesel vehicles above 2,000 cc in December 2015—the curbs were eventually lifted. But it was the first sign of trouble for vehicles powered by the dirtier fossil fuel. The next setback came from deregulation of diesel.

No Subsidy, CNG Challenge

Apart from being the go-to option for packing extra torque, diesel cars were a preferred choice for those who clocked more kilometres. Cheaper fuel helped them make up for the extra upfront cost of a diesel engine.

That changed about five years ago. Diesel prices across the country narrowed the gap with petrol after deregulation in 2014, and subsequent increases in state and central taxes. It’s no longer as cost-efficient to pay extra for a diesel variant.

Long-distance cab operators, among the biggest contributors of demand for diesel-powered cars, have now shifted to petrol. And city taxi fleets, including ride-hailing firms Ola and Uber Technologies Ltd., use CNG variants to cut down costs. Maruti Suzuki, which makes the popular Swift Dzire Tour model used by fleet operators, saw the share of diesel car sales fall from the peak of 31 percent in FY17 to 25 percent in FY19.

The Swift, Dzire, Brezza and Ciaz are the key models in Maruti’s diesel portfolio. Apart from the Brezza, Maruti’s biggest-selling diesel car, other models also come with petrol variants. The company plans to launch the petrol-based Brezza with its new 1.0-litre booster-jet engine.

“The proportion of diesel car sales in the passenger vehicle industry has continued to drop over the past years as price differential between petrol and diesel has reduced,” Hetal Gandhi, director at Crisil Research, told BloombergQuint. “This led to manufacturers launching petrol variants of utility vehicles.”

The share of diesel vehicles to the overall car sales nearly fell by half in the past five years. The contribution of petrol variants rose from 61-65 percent in FY15 to 76-80 percent in FY19.

And Maruti Suzuki isn’t the only one looking to drop small diesel cars. Tata Motors Ltd. also said rising costs will make them unviable for both consumers and automakers.

“The introduction of BS-VI will make the compliance expensive, particularly for small diesel cars,” Mayank Pareek, president of passenger vehicle business unit at Tata Motors, told BloombergQuint. “Given that these high costs will ultimately have to be passed on to the customer, the sale of diesel vehicles will logically see a decline.”

Pareek said low demand for the entry and mid-sized diesel models will not justify the high costs involved in developing a new small engine. “Moreover, around 80 percent of the demand in the segment is for the petrol variants and thus the additional investment required does not seem viable.”

And while it’s too early to expect much demand for electric vehicles, Patil pointed to Maruti Suzuki, Tata Motors and Mahindra and Mahindra Ltd. making investments in battery-powered cars. “Auto companies can bet on electric and CNG-fuelled portfolios to compensate for the diesel engine related BS VI transition.”