The changing behaviour of car buyers in India

Last year saw a reduction in the demand for diesel cars

The increase in disposable incomes in both rural and urban areas, clubbed with the availability of finance facility, has fuelled the demand for cars over the years.

However, during 2012-13 and 2013-14, the sale of cars witnessed a decline of close to 7% and 5%, respectively, due to slump in demand, primarily because of high fuel and interest costs, coupled with the uncertain economic environment. The favourable international crude oil prices in the last one year and the subsequent lowering of petrol and diesel prices in the country came as a morale booster for the auto industry and car sales in the last financial year (2014-15) grew by close to 5%.

Since petrol and diesel are complementary goods for cars, accordingly the demand of cars has an inverse relation with the prices of these commodities. Over last year, there has been a dramatic increase in the excise duty on petrol and diesel, which led to a shift in consumers’ preference too. It is apparent that percentage variation in excise duty of diesel is more than that of petrol. This has resulted in reduction in the demand for diesel cars.

To add to this, the central government has deregulated the price of diesel. The National Green Tribunal has also contributed to the downward trend, by proposing to impose a ban on diesel vehicles which are more than 10 years old. On account of these developments, the auto industry is expecting an upward shift in the demand for petrol cars. Accordingly, investments in diesel car manufacturing are witnessing a downward trend.

For an average user, driving a diesel car is costlier when compared to a petrol car. However, driving a diesel car can be cost-effective with a monthly usage of 5,000 km or more. But keep in mind that the increase in excise duty rates over the last year knocked off the potential saving on basis of a usage of a car also.

In addition to levy of taxes on petrol and diesel, the auto industry is subjected to taxes such as excise duty, national calamity contingent duty, automobile cess, value-added tax, octroi, etc. The rate of excise duty on cars depends on two criteria—vehicle size and engine capacity. Under excise laws, the rate of excise duty does not differ depending on the type of fuel. VAT rates also are not governed by the type of fuel.

To sum it up, no difference in tax rates on cars, i.e. diesel or petrol, fluctuation in prices of diesel or petrol, significant increase in excise duty on diesel, and deregulation of diesel price have led to a shift in consumer demand. Not only this, investments in plants with capacity to build diesel cars have witnessed a slump, as diesel cars are no longer a preferred mode of transportation.

Once hybrid cars become popular in India, this could further result in shift of consumer behaviour, considering the aspects of fluctuating prices of fuel and an awareness to conserve the environment. Consumers would expect the government to rationalise tax structures to accommodate these aspects. Car manufacturers too deserve to have a level-playing field, in keeping with the Make-inIndia initiative.