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Effects of Rising Fuel Prices in Indian Car Industry

The brutal impact of soaring fuel prices is being felt by the entire Indian economy. The present situation compels and threatens to change the way Indians live, eat, enjoy and educate.

Rising fuel prices is continuously affecting the lifestyles as well as influencing the car buying decision of Indians. Consumers are continuously restricting themselves from buying new cars and even from going for a long drive. No one ever thought that the rise in fuel price will be so devastating.

India raised its petrol and diesel prices by almost 10% in June. June 21, 2008 sees the highest inflation in oil prices since May 6, 1995. The inflation in May 1995 was 11.5% and June 21, 2008 witnessed 11.63%.

Here is a long list of consequences that rising fuel price have made on the Indian car industry. The results are an output of a consumer survey based on the Indian oil economy regarding the highlights on inflation, oil consumption, oil production, oil imports, and a intensely effected Indian economy due to increase in oil prices.

bullet Highlights on Inflation

Following are some highlights on inflation that were announced at a meeting of India’s Cabinet Committee on Political Affairs on June 4, 2008. The meeting was presided over by Prime Minister Manmohan Singh. The following hikes took place in the country from June 4, 2008.
  • Petrol to be hiked by Rs.5/litre
  • Diesel prices to be hiked by Rs.3/litre
  • No hike in kerosene prices
  • Cooking gas to be hiked by Rs.50 per cylinder
  • Petrol cost in Delhi would be Rs.50.56/litre
  • Petrol price in Mumbai would be Rs.55.51/litre
  • Diesel cost in Delhi would be Rs.34.80/litre
  • Diesel price in Mumbai would be Rs.39.08/litre
  • Import duty on crude oil not reduced
  • Import duty on diesel and petrol reduced to 2.5%
  • Excise duty on petrol and diesel slashed by Re.1
  • Government would issue oil bonds worth Rs.946 billion to support oil firms in India

bullet Calculations of Oil Prices in India

The above mentioned highlights have greatly influenced the total cost price of oil in the country. All the factors like import tax, excise duty and other taxes levied by the government affects the total cost price.

Here there is an explanation of how fuel price is calculated and how taxes influence the cost price. If the cost price of petrol per liter is Rs 58.90, following is the break up for the same:

Basic Price: Rs 28.93
Excise duty: Rs 14.35
Education Tax: Rs 0.43
Dealer commission: Rs 1.05
VAT: Rs 5.5
Crude Oil Custom duty: Rs 1.1
Petrol Custom: Rs 1.54
Transportation Charge: Rs 6.00
Total price: Rs 58.90


bullet Oil Consumption in India

The list below is the total oil consumed in barrels per day in India. There may be some discrepancy between the oil produced or imported and oil consumed. This is mainly because of the omission of stock changes.

Year Oil Consumption (bbl/day)
2004 2,130,000
2005 2,130,000
2006 2,320,000
2007 2,450,000
2008 2,438,000 (est.)



bullet Oil Production in India

The list below is the total oil consumed in barrels per day in India. There may be some discrepancy between the oil produced or imported and oil consumed. This is mainly because of the omission of stock changes.

Year Oil Production (bbl/day)
2004 732,400
2005 780,000
2006 785,000
2007 785,000
2008 834,600 (est.)

bullet Oil Imports in India

The table below conveys the total amount of oil imports in barrels per day in India. The amount is inclusive of all the oil products.

Year Oil Imported (bbl/day)
2006 2,090,000
2007 2,090,000
2008 2,098,000

bullet Immediate Effect of Rising Fuel Prices

The inflation has risen so sharply that no one had time to think over any issues and be planned. There were some immediate effects that no one was able to overcome. Some of them are as follows:
  • Poor section of the society is unable to buy daily food intake because food products zoomed about 0.9%.
  • Some people even reduced the intake of costly healthcare products because the prices climbed to about 0.6%.
  • Industrial applications were reduced because the costs of alloys and metals increased by 0.8%.
  • Car sales gone down to about 8% as compared to last fiscal year.
  • Market shares also went down with the shaking economy.

bullet Consumer’s Perception

High inflation has brought down the car market forcing the car manufacturers to come up with exciting offers to lure customers. But the offers didn’t turn out to be successful because consumers had their own perspectives.
  • 92% of the prospective buyers have a belief that the fuel price will go down in another three to four months and they wish to wait for their next purchase.
  • 80% of the drivers try to make their daily activities in limited drive.
  • 66% have switched over to public transport and quit driving.
  • 87% consumers are in hunt for a fuel efficient car.
  • 38% of the consumers are trading or selling their cars in return of something with better fuel efficiency.
  • 20% of the prospective buyers are happy driving their two-wheelers.

bullet Miscellaneous Effects of Rising Fuel Prices

Apart from having a devastating effect on the Indian car industry, rising fuel prices have also wound down the booming airline industry and affected the electric power plants of the country.

The Indian airline industry was flying high but the sudden hike in fuel prices brought down the faith of other major players in the same field including Air India, Jet Airways, Kingfisher and SpiceJet.

Indian power system also faces a great threat by the rising oil prices. The major Indian cities like Mumbai and Bangalore are facing frequent load shedding due to oil shortage. People residing in these cities are facing this problem of unscheduled long hours of power cut daily.

In short, high oil prices have become a pain at the pumps, in the houses and even in the industries, dictating a heavy loss to the Indian economy.