New Delhi: Higher prices at diesel pumps across India will nibble at demand rather than crush it as robust growth in Asia’s third-largest economy fuels oil consumption.
Before the price hike, oil ministry estimated its million-plus barrels a day diesel market was set to grow by 5-6% this fiscal year for the most popular transport fuel among its 1.2 billion population.
The latest price increase may see industrial users and power plants switch to cheaper fuel oil, analysts said, trimming growth in diesel demand by at most 19,500 barrels per day, from estimated growth of about 60,000-80,000 bpd in 2011.
Much of India’s diesel demand is inelastic, driven by the main consumers in the transport and agriculture sectors.
“I expect there to be some moderation in diesel demand growth although this will be due to seasonal as well as pricing factors,” Thomas Grieder, an analyst at IHS Global Insight, said.
“It will not be too extreme as many consumer groups have limited options to switch their consumption patterns.”
India’s fractious coalition government raised prices of diesel and kitchen fuels to cut the hefty bills it has to pay to allow state oil firms to sell at subsidised rates.
The government also eliminated the import duty on crude boost the finances of the state oil firms, which dominate the retail market .
Morgan Stanley estimates the government could save as much as a third of its near $40 billion subsidy payout to state oil firms in the current fiscal year, helping it stay on course to meet a fiscal deficit target of 4.6% of gross domestic product in 2011-12.
Some Indian states have also not added local levies to the Rs 3 a litre increase in diesel prices. For example, the increase in Delhi would have been Rs 3.40 per litre if the state government had also levied extra tax on the fuel.
“Even if there is no tax reduction (by state governments) the impact on demand growth may be 5-10,000 bpd, but closer to 5,000 bpd,” said Mark Freier, senior analyst at PFC Energy.
“If you look at the last seven years, demand is pretty inelastic in transportation and agriculture.”
Satwant Singh, a 46-year-old rice and wheat farmer in northern Punjab state, expresses views typical of many rural users of diesel.
“Because of higher prices, I have brought down usage of diesel in the past few years, but it’s not possible to cut it further ... the diesel price rise will cut our profit, but we don’t have an option,” he said.
HSBC expects growth in diesel use to ease to around 5% — or 61,000 bpd — in the current financial year and the next, down from 6.6% in the year to March 2011.
“We expect moderation in diesel demand growth due to several concurrent factors including the latest end-user price increase,” said Kumar Manish, HSBC’s senior oil and gas analyst for India.
Praveen Kumar, senior consultant at FACTS Global Energy in Singapore, does not see a change in diesel demand.
“As this remains a one-off price hike we do not expect demand to take a major hit. From a seasonality point of view, diesel demand usually takes a drop during Q3 due to monsoons. Thus a hike around this time would also limit the extent to which diesel demand could take a hit,” he said.
FACTS sees an annual 4.5% rise in India’s diesel demand to about 1.3 million bpd in 2011.
Freier said the government could even consider a reduction in diesel prices later in the year depending on the outlook for inflation and global oil costs.
“There is little upside potential for crude prices in the second half, so that the Indian government may opt to lower diesel prices somewhat in the fall, depending on its inflation expectations for the winter months,” he said.
Economy to fuel demand
State fuel retailers feel India’s diesel demand is unlikely to soften much because of the price increase and will be more sensitive to the country’s economic growth, targeted at 8.5% in 2011-12.
“As it is, product demand is growing because of growth in the economy. We have seen in petrol, the demand has not come down despite price increases,” said S. K. Joshi, head of finance at BPCL.
Government freed petrol prices a year ago and since then they have gone up in stages by about 23%.
While India should keep growing at rates many nations would envy, Asia’s third-largest economy faces a period of reduced growth and stubbornly high inflation.
India’s industrial output growth slowed in April, the latest sign that the rising cost of credit and inflation are acting as brakes on the economy.
Inflation, currently at about nine%, could climb into double digits with the latest fuel increases and prompt further interest rate rises, adding to pressure on family finances in a country with 500 million people living on under $1.25 per day.