CRISIL Research: Time taken to recover the premium paid over a petrol variant has nearly doubled.
Diesel cars have been smoking hot in the last couple of years because of a wide differential in the price of fuel in India driven by disparities in excise duty and sales tax. But with the price gap between petrol and diesel narrowing sharply since fiscal 2012, the extra money paid to buy a diesel variant no longer makes economic sense.
Here’s the math: In fiscal 2012, when the fuel price differential was at its widest, it took around 2.5 years to recover the premium paid to buy a diesel car, considering the savings made on fuel as well as resale price. Today, it will take nearly six years to recoup the money. This takes into account average car usage in India, which is 10,000 km annually. If one also factors in the time value of money, recovering the price premium will take even longer. This clearly indicates that purchasing a diesel car today does not make economic sense for private users, unless justified by usage. For commercial users, however, diesel cars still make economic sense given that usage will be much higher.
Diesel cars have typically been priced higher in India compared with petrol variants because of technology costs, better mileage, cheaper cost of fuel and demand. This “price premium” ranges from about Rs 1 lakh for small car models to as high as Rs 3 lakh for luxury sedans. In percentage terms, diesel cars in India are priced 20-25% higher than the petrol variant for the same model, which is higher than the average of 10% price premium in the European Union.
Fuel cost, which is a calculus of fuel price and mileage, is one of the major components of the ownership cost of a car. Annual fuel costs is currently estimated to be about 30% less for a diesel variant. But this number has been decreasing -- after touching a peak of 50% in fiscal 2012 -- as the government began to bite the subsidy bullet and raising the price of diesel. What this has done is stretch significantly the time taken for a diesel car owner to recover that extra money paid for purchase, or the so-called “recovery period”. Considering the way diesel and petrol prices are converging, the recovery period for a first-hand diesel car will be close to the higher end of the typical holding -- or ownership -- period of between four and six years if it is driven 10,000 kms per annum.
Disclaimer: CRISIL Research, a division of CRISIL Limited (CRISIL), has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL’s Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL’s Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
