Will higher diesel prices hit consumption?
With the economy picking up steam, the demand outlook for diesel is robust
Diesel prices are at an all-time high. Will skyrocketing prices hit demand for the fuel? That is a possibility, but the impact owing to prices is unlikely to be much. For one, with the economy picking up steam, the demand outlook for diesel is robust. Secondly, demand for the auto fuel is typically inelastic.
Cast your eyes on the chart alongside. Over the financial years 2010-2018, there is only one instance when diesel consumption declined and that was in fiscal 2014 when it declined 1% year-on-year.
What had happened? In India, the transport sector is a major contributor to diesel demand and FY14 was particularly disappointing on this count. According to Anoop Bhatia, VP and sector head, corporate ratings at Icra Ltd, a substantial slowdown in the domestic economy had led to subdued transportation activity apart from reduced diesel consumption from diesel generator of industrial units, which was also impacted due to improvement in power deficit situation.
“Demand for diesel in FY14 was adversely affected owing to 25% year-on-year decline in sales volume of medium and heavy commercial vehicles and about 18% drop in light commercial vehicles (LCV),” said Bhatia. Cut to now, FY18 diesel consumption growth (based on provisional figures) of 6.6% coming after a 1.8% growth in FY17, isn’t too bad. In recent months, diesel demand growth has been healthy though helped by a favourable base, as demand was adversely impacted a year ago owing to demonetization.
With the impact of demonetisation and implementation of the goods and services tax broadly over, the outlook for diesel demand is strong. Analysts expect the expected increase in commercial vehicles to support infrastructure projects and increased rural spending to keep diesel demand upbeat.
Also, there is an element of inelasticity attached to diesel demand, says Bhatia. “Major consuming sectors such as commercial vehicles are doing well and that means even if diesel consumption growth rate comes down owing to higher prices, growth is unlikely to be negative,” reckons Bhatia. Having said that, how the monsoons shape up will be worth watching. In general, lower rainfall results in higher usage of diesel for agriculture related activities.
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