Personal Finance

It’s advantage petrol cars now

Anand Kalyanaraman | Updated on November 19, 2014 Published on October 11, 2014

At today’s fuel prices, it makes economic sense to go for a diesel car only if you plan to use the vehicle extensively

Planning to buy a new car anytime soon? Go for the petrol version if your usage is going to be low to moderate (say 20-40 km a day). But if you plan to use the car heavily (say 50-60 km a day), it makes sense to go for the diesel version. This is a change from our recommendations in early 2012 and mid-2013 when we favoured diesel cars even when the usage was low to moderate.

Running costs run up

In January 2013, a litre of petrol cost more than ₹70 in Chennai, while diesel sold for about ₹50 a litre – the difference between the fuels being a steep ₹20. But since then, the gap has narrowed considerably. The price of petrol, a deregulated fuel, went through many ups and downs and today costs nearly the same as in January 2013. But the price of diesel, not yet decontrolled, has steadily moved north to ₹63 a litre at present. This was the result of the monthly hike of 50 paise in diesel prices to gradually remove subsidies on the fuel. Petrol now costs just about ₹8 more a litre than diesel.

This shrinking price differential between the fuels has dented the edge which diesel cars traditionally had over petrol cars. The biggest advantage diesel cars had over their petrol variants was sharply lower running costs. This was the result of both better mileage and lower cost of diesel.

A leading car dealer in Chennai confirms that a popular diesel car in the compact category runs at least three-four km more on a litre than its petrol variant. This, combined with much lower fuel cost compared with petrol, translated into big regular savings on the diesel car. In January 2012, for instance, the running cost for a diesel car in the compact category was nearly 50 per cent lower than that of its petrol variant. These lower running costs reduced the disadvantages that diesel cars otherwise have.

Diesel cars on the back foot

One, diesel cars entail higher maintenance and insurance expenses compared with their petrol counterparts. Next and more importantly, the purchase cost of diesel cars is significantly more — at least ₹100,000 costlier than the petrol versions, says the car dealer. This also means higher financing costs. On the positive side though, diesel cars fetch higher resale price – this reduces the effective capital expenditure.

When the price differential between the cost of petrol and diesel was significant, diesel cars had a growing number of customers flocking to them – this meant better resale premium over petrol cars. This combined with lower running costs more than offset the drawbacks of diesel cars, making them more economical than petrol cars even for short distances.

But rising diesel price has altered the equation. The running cost advantage of diesel cars over petrol cars has shrunk to less than 30 per cent from more than 50 per cent in January 2012. And now with an increasing consumer shift in favour of petrol cars away from diesel cars, the resale premium on diesel cars has reduced. Meanwhile, maintenance and insurance expenses have increased. All these make diesel cars costlier than petrol cars for those who plan to use their vehicles lightly to moderately, say for 40 km a day.

To understand the financial impact, refer to the accompanying table which considers cumulative cost calculations for three years, a minimum holding period for most users; we have considered the possible reduction in prices (₹2.5 per litre of diesel and ₹1 a litre of petrol) that the government may announce after the Maharashtra and Haryana State elections this week. All said, it still makes economic sense to go for a diesel car if you plan to use the vehicle extensively (at least 50-60 km a day). Despite the lower fuel price differential with petrol now, a diesel car will save you running costs over long distances — higher than the difference in capex, maintenance and other costs.

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