Diesel passenger vehicle share in India may decline to 15-18% in FY 2022: ICRA

China, USA, EU, Japan and India are the top five automobile markets volume-wise. However, China and US, the world’s top 2 automobile markets have a negligible share (less than 2%) of diesel vehicles in overall car sales.

Besides the fact that diesel vehicles are thrifty, one of the major reasons for may to prefer them is that the fuel has been more affordable than petrol. However, now the price gap between petrol and diesel is shrinking and this could accelerate the shift towards petrol/CNG in the Indian passenger vehicle (PV) market in the coming years. According to an analysis conducted by ICRA, diesel PV share in India is expected to decline to 15-18 percent in FY 2022 from the current 29 percent in FY 2020. Of this percentage, the share of diesel cars will slip to around 5-7 percent (from 11 percent) whereas the UV segment’s share will gradually reduce to sub 40 percent (from 65 percent) over the coming two-three years.

ICRA’s analysis further explains that it no longer makes sense for an average car buyer to opt for a diesel car and that the entry-level segment (sub-Rs 5 lakh) has almost entirely shifted to petrol/CNG. The taxi segment accounts for a sizable share of overall diesel vehicles in India but the government’s initiative to push clean vehicles (CNG/LPG/Hybrid) is yet to materialise completely. The agency states that the CNG vehicles (that deliver a lower running cost compared to diesels) share will benefit at the expense of diesel share.

After the implementation of BS6 emission standards, upfront price of diesel vehicles has increased by Rs 50,000 to Rs 70,000. This, along with tapering fuel price gap, is accelerating the shift away from diesel powertrains Furthermore, regulations like the ban on older diesel vehicles and push for CNG in commercial segments would also lead to dampening demand for diesel vehicles in the medium to long term.

The share of diesel vehicles has already reduced to 29% in FY2020 from 58% from FY2013, and it will further reduce to about 15%-18% level in the next three years. CNG vehicles will mainly benefit from the shift, reasons – lower upfront cost and better cost economics than a diesel vehicle. The share of CNG vehicles, currently below 5% in overall PV sales is expected to outperform other fuel segments in the medium term.

In line with the emerging trend, OEMs are re-aligning their business strategy; some have exited from diesel powertrain offerings and are focusing only on hybrids/CNG. Currently, the small car segment is largely petrol-driven whereas the UV segment is diesel-driven. In the luxury segments, the sales mix is tilted towards diesel cars.

The share of diesel engines in the passenger car segment remains low at 11%; however, the share of diesel vehicles was relatively high in the UV segment at 65% during FY2020. Consistent outperformance of the UV segment has supported diesel share in the passenger vehicle segment over the last few years.

Also read: Diesel engines that were killed due to BS6: India’s favourite multijet also a victim

Nevertheless, improved traction of the petrol engine, especially in the compact UV segment will result in dilution of diesel share in UV segment over the medium term. ICRA expects the share of diesel vehicles in new UV sales will decline below 40% in the next 2-3 years from 65% in FY2020 (and 97% in FY2013) while the share of diesel in the car & van segment will settle at around 5-7% in the medium term.

Globally, China, USA, EU, Japan and India are the top five markets volume-wise. Interestingly, China and US, the world’s top 2 automobile markets have a negligible share (< 2%) of diesel vehicles in overall car sales. However, diesel vehicles accounted for about 30% and 29% of new PVs sold in EU and Indian markets during CY2019 and FY2020, respectively.

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