Diesel in My Veins

Indian Express reported last week that petroleum ministry has put forward a proposal to raise excise duty on diesel cars by Rs 80,000. The money thus raised would go to oil companies which are now suffering heavy losses by selling diesel at a subsidized rate, and also prevent the “dieselisation” of the economy, the report said.

I have no doubt that the additional funds will help oil majors, but will it have an impact on "dieselisation"? In other words, will the additional Rs 80,000 change the customer preference, which in the recent years has been tending towards diesel vehicles?

It would, if this exceeds the benefits that come from driving a diesel.

To find this out, I did a quick, back of the envelope calculation taking Maruti Swift's diesel and petrol variants as examples, and making some assumptions about usage and fuel price hike to calculate the present value of fuel expenses. And, it looks like Rs 80,000 will hardly make a dent in the dieselisation of the economy.

Here are the numbers:

Vehicle                          - Maruti Swift LDI (diesel)                  - Maruti Suzuki Swift LXi

Price (Bangalore)          - 466895                                             - 419000 Mileage (City)                - 13.8 kmpl                                         - 11.5 kmpl
Fuel price (Bangalore)  - 45.38                                                -  73.72

Assumptions made to calculate PV of fuel expenses are same for both: Fuel inflation 3%, Discount rate 10% and number of years 10. (I kept the resale value and maintenance charges out from the equation.)

And here's what I found: The total cost of a petrol vehicle (ex-showroom price plus present value of fuel expenses over 10 years) is Rs 9.5 lakhs, and that of diesel vehicle is Rs 7.4 lakhs. A difference of over 2 lakhs. Unless the additional excise duty comes close to this number, it might not make any difference to the bigger trend of customers preferring diesel over petrol.

The thoughts and opinions shared here are of the author.