UNIVERSITY OF PETROLEUM & ENERGY STUDIES

“To do a comparative study of India with other developing nations for the impact of deregulation

of Petrol and Diesel prices.”

DISSERTATION–2 SEM -8

COMPLETED UNDER THE MENTORSHIP OF

Dr. A.M. Urkude

COMES, UPES

SUBMITTED BY

AnujAngirish

R-430209008

INTEGRATED BBA + MBA SEM 8

UPES

SNO Particulars

1 ACKNOWLEDGEMENT

2 EXECUTIVE SUMMARY

3 OBJECTIVE OF THE STUDY

4 NATURE & SCOPE OF THE PROJECT

5 INTRODUCTION TO THE TOPIC

6 REVIEW OF LITERATURE

7 EFFECT OF AUTOMOTBILE INDUSTRY

8 RESEARCH METHODOLOGY

9 DATA ANALYSIS & INTERPRETATION

10 SUGGESTION

11 RECOMMENDATION

12 CONCLUSION

13 BIBLIOGRAPHY

CONTENTS

ACKNOWLEDGEMENT

I am privileged to take this opportunity in expressing my deep sense of gratitude to Dr. A. M.

URKUDE for having spared his valuable time and guidance which helped me throughout my

research. He was a constant source of inspiration during the study.

I am also thankful to the other teaching staff of University of Petroleum & Energy Studies. It was

only due to their guidance that this project could be brought to this form in time and in an

efficient manner

EXECUTIVE SUMMARY

It is evident to everyone how volatile the prices of crude oil and petroleum in the global market

are. Considering the fact that they are non-renewable source of energy and also the fact that India

has one of the highest energy needs in the world, it is not a cause of surprise to anyone how

volatile Indian Economy becomes whenever there is an increase in the prices of oil anywhere.

Further considering the fact that government since June 2010 has given oil companies the power

to decide the price of petrol in the country which has alienated the public from the government. It

is to note here that during that one year period after the introduction of this policy by the

government the price of petrol rocketed almost 20 rupees higher. The effect of which has been

that the common man and middle class families now find it hard to own a private vehicle. The

cost of living has also increased and not to say about the falling price of Indian rupee.

This project has tried to analyze the impact of the rising and fluctuating crude oil prices on the

Indian economy and with a special reference to the automobile sector in India as to how it is

affected by an increase in fuel prices.

OBJECTIVE OF THE STUDY

The following are the main objectives of my research study –

1) To study and understand how the global international situations are affecting the fuel prices in

India.

2) To study the impact of the higher oil prices on the global economy in brief.

3) To understand the effect of rising fuel prices on the Automobile sector inIndia.

4) To study the export competitiveness of the Indian automobile industry.

5) To study the impact of global recession on the car industry in India.

NATURE & SCOPE OF PROJECT

The project entitled “To do a comparative study of India with other developing nations for the

impact of deregulation of Petrol and Diesel prices.” has been done at Thane as a completion part

of MBA program. The nature of the project is to study of this project is to analyze the impact on

the Indian economy because of an unsteady global markets with respect to crude oil sector. This

in turn affects the automobile industry in India. So the research analyses the impact of the effect..

The scope of the project includes research program has been designed

1) To make the person aware of happenings of the real business world.

2) Analysis use to compare the effects of crude oil price on Indian economy.

3) Understand and Study the economic growth of Indian Crude Oil.

4) Analyze the trend in oil price.

5) Understand the relation between the Oil price and Inflation.

In this project, I worked upon the analysis of the effect of rising fuel prices on the automobile

sector with respect to customer attitude, and dealer preference through personal contact,

interview and questionnaire.

INTRODUCTION

Efficient, reliable and competitively priced energy supplies are prerequisites for accelerating

economic growth. For any developing country, the strategy forenergy development is an integral

part of the overall economic strategy.

Efficient use of resources and long-term sustainability remains core objective of economic

planning. Sustainability would take into account not only available natural resources and issues

related to ecological balance but also established delivery mechanisms, the technological

constraints that are prevalent in the system and immediate compulsion to meet the priority needs

of the economy,economic equity and self-reliance. Simultaneous and concurrent action is,

therefore, necessary to ensure that the short-term concerns do not detract the economy away

from the long-term goals.

Realization of high economic growth aspirations by the country in the coming decades, calls for

rapid development of the energy market. The energy resources available indigenously are limited

and may not be sufficient in thelong run to sustain the process of economic development

translating into increased energy import dependence. The base of the country’s energy supply

system is tilted towards fossil fuels, which are finite. This has serious long-term implications as

the emerging patterns of energy consumption, which is heavily skewed towards oil and gas,

bring to focus many ecological and environmental issues.

3

INDIAN SCENARIO

India is and shall remain heavily dependent on coal for about half of its primary commercial

energy requirements with the other half being dominated by oil and gas put together. The Indian

hydro carbon industry is currently passing through a challenging phase. Increasing concern for

energy security, increasingly stringent environmental regulations, emergence of natural gas and

soaring crude oil and natural gas prices have thrown up both challenges and opportunities to the

Indian oil and gas industry.

Projected high domestic demand for petroleum products is expected to push investments into the

refining sector. India, with 18 refineries, currently has asurplus refining capacity which has

placed India amongst net petroleum product exporter countries. Increasingly stringent fuel

specifications have put pressure on the old and non-compliant refineries to upgrade their refinery

configurations to produce compliant fuels. The Government is seriously considering promoting

India as a competitive refining destination to service export market for petroleum products as

also integrating it with the petrochemical andchemicals businesses to produce and export higher

revenue generating valueadded products.

Exceptionally high crude oil prices in the international market and an almost stagnant domestic

crude oil production has caused a drain on country’s foreign exchange reserves. Besides

augmenting domestic reserves, India has successfully ventured overseas to acquire oil and gas

assets and entered into long-term Liquefied Natural Gas (LNG) contracts as measures for

enhancing energy security.

Persistence of high oil prices and dependence on imported oil leaves India with some difficult

choices to make. The choice is between (a) passing on the price increase to the consumer; (b)

rationalizing taxes and other levies on petroleum products; and (c) making the National Oil

Companies (NOCs) bear the burden.Although the Government has resorted to a combination of

all above three options in the past, each of these options has its own drawbacks. In the longrun,

the only viable policy to deal with high international oil prices is to rationalize the tax burden on

oil products over time, remove anomaly, if any, in the existing pricing mechanism, realize

efficiency gains through competition at the refinery gate and retail prices of petroleum products,

and pass on the rest ofthe international oil price increase to consumers, while compensating

targeted groups below the poverty line as much as possible.

With the advent of LNG and progressive de-control of gas prices, the natural gas sector in India

has progressed and achieved some degree of maturity. It has managed to receive progressively

growing attention from global companies and has made rapid strides during the last five years.

Current natural gas policy dispensations have created numerous challenges for the gas sector.

Major among them are the demands of competing consumer industries, ensuring competition and

open access in the pipeline transportation and distribution networks, reducing the supply demand

gap that exists today.

Energy is essential for living and vital for development. Affordable energy directly contributes to

reducing poverty, increasing productivity and improvingquality of life. Likewise lack of access

to reliable energy is a severe impedimentto sustainable social development and economic

growth. For any developing country, the strategy for energy development is an integral part of

the overall economic strategy. Efficient use of resources and long-term sustainability remains

core objective of economic planning. Sustainability would take into account not only available

natural resources and issues related to ecological balance but also established delivery

mechanisms, the technological constraints that are prevalent in the system and immediate

compulsion to meet the priority needs of the economy, economic equity and self-reliance.

Simultaneous and concurrent action is, therefore, necessary to ensure that the short-term

concerns do not detract the economy away from the long-term goals.

GLOBAL OIL SCENARIO

World oil use is expected to grow from about 80 million barrels per day (mbpd) in 2003 to 98

mbpd in 2015 and 118 mbpd in 2030 as per Energy Information Administration (EIA),

International Energy Outlook (IEO) 2006.

To meet the projected increase in world oil demand, total petroleum supply in2030 will need to

be 38 mbpd higher than the 2003 level of 80 mbpd. Of this, China is projected to consume

additional 9.4 mbpd, US 7.5 mbpd and Asia (other than China & India) 6 mbpd. The balance

growth is expected in SouthAmerica, Africa and Middle East. As per the same report India is

expected to consume additional 2.2 mbpd. OPEC producers are expected to provide 14.6 mbpd

of the increase. Higher oil prices cause a substantial increase in non-OPEC oil production—23.7

mbpd, which represents 62 percent of the increasein total world oil supplies over the projection

period. In addition, unconventional resources (including biofuels, coal-to-liquids, and gas-to

liquids) are expected to become more competitive

Globalization and Diversification Efforts

The Indian economy is set to grow at the fastest rate ever in the coming decades with a major

thrust being to manufacturing and services sector as well as formation of Special Economic

Zones (SEZs). India, traditionally an import dependent country, has set forth a clear agenda for

development of the energy sector in the coming decades with a clear emphasis on stepping up the

steam on domestic production while simultaneously pursuing various import options. The

government policy clearly emphasizes the need for energy security through diversification of

energy resources while integrating with the global trends to emerge as an important player in the

global arena. In view of unfavorable demand–supply balance of hydrocarbons in the country,

acquiring equity in overseas oil and gas assets is one of the important components of enhancing

oil and gas security. The Government is encouraging oil PSUs to aggressively pursue equity oil

and gas opportunities overseas. OVL has made an investment commitment of over US$ 5 billion

and has an oil and gas production of 6.6 MMTOE (Oil and oil equivalent gas) in the year 2005-

06.OVL has a target to produce 20 MMTPA of O+OEG by 2020. OIL, IOC and GAIL are also

engaged in acquiring overseas E&P assets. In addition, private Indian companies like RIL and

Essar are also pursuing E&P opportunities abroad.

IMPORT DEPENDENCE AND ITS IMPACT

Presently, about 45 per cent of primary commercial energy needs are met from oil and gas. Of

this, over 70 per cent of domestic oil consumption is imported mainly from Middle East. Gas

imports started in 2004-05 and in 2005-06 about 19 per cent of the gas consumption was met

from imports. Import dependence is likely to increase considering low accretion to domestic oil

and gas reserves. Infact, the case of India is not typical and several oil consuming countries face

similar situation. It is expected that global oil dependence on OPEC will continue to rise with

countries competing for scarce resources.

The country has spent foreign exchange to the tune of about $ 39 billion in 2005-06 towards the

import of crude oil. The projected out go of foreign exchange on account of import bill of Crude

Oil in 2006-07 will remain high. The crude oil payments are in fact more than double for every

barrel of crude in2005-06 over 2002-03. This is a high price to pay for our

dependence.Unfortunately, even in the future this position does not appear to improve.Given our

track record in domestic E&P, our situation is likely to deteriorate.

Oil price vulnerability may affect GDP growth and has the potential to disrupt future

development. Obviously India needs to shift focus from short-term management of energy

requirements and pricing to long-term energy policy inlight of core objectives indicated above

and particularly in light of recent price spikes in the international oil markets. The challenge then

is to ensure supply ofenergy at affordable price within available resources. Policy direction and

intervention need to reorient the approach to match circumstances.

Economic theory suggests that larger the number of companies operating in asector, the more

competitive it is and greater the productivity gains. Though at the same time economists have

difficulty in finding perfectly competitive markets and particularly so in oil and gas. This is so

because oil is intertwined with national interests and energy is recognized as fundamental for

economiesto function. In fact it is easier to find regulation and control in oil sector more soin the

developing countries.

Marketing and Distribution of Petroleum Products

The landscape of country’s POL distribution has undergone a change with surplus availability

situation in most of the products. Imports/exports ofproducts are taking place on need/economic

considerations. Based on supply demand balances, companies are entering into bilateral

agreements for product exchanges and sharing infrastructure on commercial considerations. New

infrastructure is being created to fulfill the demand-supply gap based on rationalization and with

a holistic view.Since logistic costs play a significant role in commercial consideration, with

growing competition, each company is trying to reduce costs of production,transportation,

overheads, etc. Expansion of pipeline network is taking place for reducing transportation costs

and product losses.Technological intervention by industry to ensure product quality and quantity

across supply chain has been initiated. Automation is being carried out at retail outlets and

terminals/depots. Further, tracking the movement of tank trucks through Global Positioning

System (GPS) is also being implemented. This ensures smooth operations, which get tracked for

any scrutiny and minimize human intervention in the processes.

Marketing of Petrol/Diesel, Kerosene and LPG

A) Petrol/Diesel –

The oil sector has been deregulated since April 2002, with the dismantling of APM, and

currently there are many players including private oil companies’ in the marketing of

petrol/diesel. The major existing policy is with respect to grantof marketing rights for

transportation fuels. As per the existing policy any newplayer willing to market transportation

fuels in India is required to invest or express intention to invest a minimum of Rs.2,000 crore in

the hydrocarbon sector, i.e., E&P, pipelines, terminals, etc. or the new player may produce 3

MMT of crude to market the fuel. This policy is an essential requirement to prevent fly-by-night

operator entering the market, and may therefore be continued. Adulteration is a menace, which

needs to be tackled by all concerned through technological and other interventions. Various steps

to curb adulteration have been initiated. These include introduction of tamper-proof locks, use of

GPS intank-trucks, introduction of marker system for adulterants like kerosene, retailautomation,

third party certification, etc. In order to check the en-route malpractices, all the company

owned/dealer owned/contractor tank trucks wouldbe covered under monitoring of movement

through GPS by March 2007.

With competition having set in, there is a lot of focus on the customer needs.Companies have

started offering better forecourt services, non-fuel products atROs, usage of credit/debit/fleet

cards with attractive loyalty programs to attract and retain customers and volumes. Innovative

methods to improve customer relationship are being introduced. With more and more ROs being

commissioned and with lowering of per pump throughput, companies May scout for

opportunities in non-fuel retailing to enhance dealers and company incomelevels.

B) LPG –

Domestic LPG, like kerosene, is subsidized by the Government. The subsidy is available to all

users of the domestic LPG, irrespective of their economic status.Domestic LPG carries non-merit

subsidy as it is not perceived as a fuel for thepoor. There is a case for gradually increasing the

prices of domestic LPG toreflect the market prices.The price difference between the domestic

LPG and non-domestic LPG (Bulkor packed) is a cause of diversion of domestic LPG to non-

domestic use, likehotels, restaurants, and automotive sector. In order to eliminate/reduce

diversionof domestic LPG to automotive sector and other commercial usage, oil industry has

initiated measures like refill audit to control the diversion.

Auto LPG dispensing facilities have been set up in select areas to control pollution and to

reduce/eliminate diversion of domestic LPG to automotive sector. This measure has yielded

results and Auto LPG sales have gone up substantially in the last two years. In order to further

encourage use of auto LPG, Auto LPG Dispensing Stations (ALDS) may be set up on priority in

bigtowns which are not likely to receive CNG in the short to medium term. Such investments, of

course, would be driven by commercial considerations.

Use of CNG in Automotive Sector

Use of CNG as an automotive fuel is being encouraged and propagated due to environmental

considerations in the cities, where gas is available. After careful consideration of the

international practices and the experience of the industry, national safety standard has been

adopted for CNG installation by the statutory bodies. Further, implementation of OISD

recommended practices need to be considered and overseen in view of the extensive use/storage

of CNG inpressurized containers in automobiles.

The OISD standard on safety requirements for compression, storage, handling and refueling of

natural gas for use in automotive sector, needs to be followed by the CNG sector. The standard

lays down the minimum safety requirements at installations handling natural gas for dispensing

into vehicles and minimum checks required in the vehicles by re fuelling stations. Natural gas is

produced both worldwide and domestically at relatively low cost and is cleaner burning than

gasoline or diesel fuel. CNG vehicles have been introduced in a wide variety of commercial

applications, from light-duty trucks and sedans - like taxi cabs, to medium-dutytrucks - like UPS

delivery vans and postal vehicles, to heavy-duty vehicles like transit buses, street sweepers

(pictured right) and school buses. In California, transit agency buses are some of the most visible

CNG vehicles.

Reasons for switching over to this alternate fuel are mainly:

1). Economic benefit: The cost of CNG is almost a third of the cost of Petrol interms of calorific

value resulting in substantial saving in fuel cost, andinvestment on the CNG kit is paid back in a

short period

2). Environment friendly: The use of CNG as a fuel reduces vehicular exhaustemissions

significantly. Carbon Monoxide emissions are reduced by 70 to 90%and Hydrocarbon emissions

by 40 to 60% as compared to vehicles that use theconventional fuel - Petrol. Carbon Dioxide

emissions, a cause for globalwarming, are also reduced significantly by 10%.

3). 100% Income Tax Depreciation: Corporate Organisations, firms, etc. canclaim 100%

depreciation on a CNG Conversion Kit as this is a pollutioncontrolling equipment. Organisations

that buy CNG Conversion Kits shouldconsult their Income Tax Consultants and avail of the

depreciation benefits

4). Flexibility and ease of use: The basic engine characteristics of a vehicle are retained while

converting it to run on CNG. The vehicle therefore is capable of running either on Petrol or CNG

at the flick of a switch on its dashboard.

AUTOMOBILE INDUSTRY IN INDIA

Automotive Industry, globally, as well in India, is one of the key sectors of the Economy. Due to

its deep forward and backward linkages with several key segments of the economy, automotive

industry has a strong multiplier effect and acts as one of the drivers of economic growth. The

well-developed Indian automotive industry produces a wide variety of vehicles: passenger cars,

light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters,

motor-cycles, mopeds, three wheelers, tractors and other agricultural equipment etc. The sector

has tremendous potential of providing employment which will increase the present figure of

employment in manufacturing sector which is quite low at 12% as compared to the countries like

Malaysia (50%); Korea (62%) and China (31%).

The auto sector reported a robust growth rate of 26 percent in the last two years (2010-2012).The

BSE AUTO Index outperformed the benchmark Nifty by 79%, 12% and 19% in FY10, FY11

and FY12, respectively. seeks to grow the industry to a size of US $145bn by 2016 and make it

contribute 10 percent to the nation’s GDP.

The automotive industry in India is one of the largest in the world and one of the fastest growing

globally. India's passenger car and commercial vehicle manufacturing industry is the seventh

largest in the world, with an annual production of more than 3.7 million units in 2010. According

to recent reports, India is set to overtake Brazil to become the sixth largest passenger vehicle

producer in the world, growing 16-18 per cent to sell around three million units in the course of

2011-12. In 2009, India emerged as Asia's fourth largest exporter of passenger cars, behind

Japan, South Korea, and Thailand. In 2010, India reached as Asia's third largest exporter of

passenger cars, behind Japan and South Korea beating Thailand.

As of 2010, India is home to 40 million passenger vehicles. More than 3.7 million automotive

vehicles were produced in India in 2010 (an increase of 33.9%), making the country the second

fastest growing automobile market in the world. According to the Society of Indian Automobile

Manufacturers, annual vehicle sales are projected to increase to 5 million by 2015 and more than

9 million by 2020. By 2050, the country is expected to top the world in car volumes with

approximately 611 million vehicles on the roads.

Tata Motors is leading the commercial vehicle segment with a market share of about 64%.

Maruti Suzuki is leading the passenger vehicle segment with a market share of 46%. Hyundai

Motor India and Mahindra and Mahindra are focusing expanding their footprint in the overseas

market. Hero Honda Motors is occupying over 41% and sharing 26% of the two-wheeler market

in India with Bajaj Auto. Bajaj Auto in itself is occupying about 58% of the three wheeler

market. Consumers are very important of the survival of the Motor Vehicle manufacturing

industry. In 2008-09, customer sentiment dropped, which burned on the augmentation in demand

of cars. Steel is the major input used by manufacturers and the rise in price of steel is putting a

cost pressure on manufacturers and cost is getting transferred to the end consumer. The price of

oil and petrol affect the driving habits of consumers and the type of car they buy.

Exports

India's automobile exports have grown consistently and reached $4.5 billion in 2009, with United

Kingdom being India's largest export market followed by Italy, Germany, Netherlands and South

Africa. India's automobile exports are expected to cross $12 billion by 2014. India's strong

engineering base and expertise in the manufacturing of low-cost, fuel-efficient cars has resulted

in the expansion of manufacturing facilities of several automobile companies like Hyundai

Motors, Nissan, Toyota, Volkswagen and Suzuki. In recent years, India has emerged as a leading

centre for the manufacture of small cars. Hyundai, the biggest exporter from the country, now

ships more than 250,000 cars annually from India. Apart from shipments to its parent Suzuki,

Maruti Suzuki also manufactures small cars for Nissan, which sells them in Europe. Nissan will

also export small cars from its new Indian assembly line. Tata Motors exports its passenger

vehicles to Asian and African markets, and is in preparation to launch electric vehicles in Europe

in 2010. The firm is also planning to launch an electric version of its low-cost car Nano in

Europe and the U.S. Mahindra & Mahindra is preparing to introduce its pickup trucks and small

SUV models in the U.S. market. Bajaj Auto is designing a low-cost car for the Renault Nissan

Automotive India, which will market the product worldwide. Renault Nissan may also join

domestic commercial vehicle manufacturer Ashok Leyland in another small car project. While

the possibilities are impressive, there are challenges that could thwart future growth of the Indian

automobile industry. Since the demand for automobiles in recent years is directly linked to

overall economic expansion and rising personal incomes, industry growth will slow if the

economy weakens.

TATA MOTORS

Tata Motors Limited is India's largest automobile company, is the world's fourth largest truck

manufacturer, and the world's second largest bus manufacturer with over 24,000 employees.

Since first rolled out in 1954, Tata Motors as has produced and sold over 4 million vehicles in

India.

With over 3,000 engineers and scientists, the company's Engineering Research Centre,

established in 1966, has enabled pioneering technologies and products. The company today has

R&D centers in Pune, Jamshedpur, Lucknow, Dharwad in India, and in South Korea, Spain, and

the UK. It was Tata Motors, which developed the first indigenously developed Light

Commercial Vehicle, India's first Sports Utility Vehicle and, in 1998, Tata Motors unveiled its

People's Car, the Tata Nano, a development which signifies a first for the global automobile

industry. Nano brings the comfort and safety of a car within the reach of thousands of families.

MARUTI SUZUKI INDIA

Maruti Suzuki India Limited, a subsidiary of Suzuki Motor Corporation of Japan, is India's

largest passenger car company, accounting for over 45% of the domestic car market. The

company offers a complete range of cars from entry level Maruti-800 and Alto, to stylish

hatchback Ritz, A star, Swift, Wagon-R, Estillo and sedans DZire, SX4 and Sports Utility

vehicle Grand Vitara. Since inception in 1983, Maruti Suzuki India has produced and sold over

10 million vehicles in India and exported over 500,000 units to Europe and other countries. The

company's revenue for the fiscal 2010-2011 stood over Rs 375,224 million and Profits After Tax

at over Rs. 22,886 million.58

HYUNDAI MOTOR INDIA

Hyundai Motor India Limited is a wholly owned subsidiary of world's fifth largest automobile

company, Hyundai Motor Company, South Korea, and is the largest passenger car exporter.

Hyundai Motor presently markets 49 variants of passenger cars across segments. Hyundai Motor

currently exports cars to more than 110 countries across European Union, Africa, Middle East,

Latin America and Asia. It has been the number one exporter of passenger car of the country for

the sixth year in a row.

MAHINDRA & MAHINDRA

Mahindra & Mahindra is mainly engaged in the Multi Utility Vehicle and Three Wheeler

segments directly. The company competes in the Light Commercial Vehicle segment through its

joint venture subsidiary Mahindra Navistar Automotive Limited and in the passenger car

segment through another joint venture subsidiary Mahindra Renault. In the year 2009, on the

domestic sales front, the Company along with its subsidiaries sold a total of 220,213 vehicles

(including 44,533 three-wheelers, 8,603 Light Commercial Vehicles through Mahindra Navistar

Automotive and 13,423 cars through Mahindra Renault), recording a growth of 0.6% over the

previous year. The company's domestic Multi Utility Vehicle sales volumes increased by 3.3%,

as against a decline of 7.4% for industry Multi Utility Vehicle sales.

.

ASHOK LEYLAND

Against the backdrop of the sharp slump in demand for commercial vehicles, during 2008-09,

Ashok Leyland registered sales of 47,118 medium and heavy commercial vehicles (M&HCV),

37.5% less than in the previous year. This includes 16,049 M&HCV buses and 31,069 M&HCV

trucks respectively, 8.7% and 46.3% less than in the previous year. While total industry volume

of the medium and heavy duty buses declined by about 8.7%, the Company's market share grew

marginally and Ashok Leyland retained its number one position in this segment.

IMPACT OF HIGHER OIL PRICES ON THE GLOBAL ECONOMY

Oil prices remain an important determinant of global economic performance. Overall, an oil-

price increase leads to a transfer of income from importing to exporting countries through a shift

in the terms of trade. The magnitude of the direct effect of a given price increase depends on the

share of the cost of oil in national income, the degree of dependence on imported oil and the

ability of end-users to reduce their consumption and switch away from oil. It also depends on the

extent to which gas prices rise in response to an oil-price increase, the gas-intensity of the

economy and the impact of higher prices on other forms of energy that compete with or, in the

case of electricity, are generated from oil and gas. Naturally, the bigger the oil-price increase and

the longer higher prices are sustained, the bigger the macro economic impact. For net oil-

exporting countries, a price increase directly increases real national income through higher

export earnings, though part of this gain would be later offset by losses from lower demand for

exports generally due to the economic recession suffered by trading partners.

Adjustment effects, which result from real wage, price and structural rigidities in the economy,

add to the direct income effect. Higher oil prices lead to inflation increased input costs, reduced

non-oil demand and lower investment in net oil importing countries. Tax revenues fall and the

budget deficit increases, due to rigidities in government expenditure, which drives interest rates

up. Because of resistance to real declines in wages, an oil price increase typically leads to

upward pressure on nominal wage levels. Wage pressures together with reduced demand tend to

lead to higher unemployment, at least in the short term. These effects are greater the more

sudden and the more pronounced the price increase and are magnified by the impact of higher

prices on consumer and business confidence. An oil-price increase also changes the balance of

trade between countries and exchange rates. Net oil-importing countries normally experience

deterioration in their balance of payments, putting downward pressure on exchange rates. As a

result, imports become more expensive and exports less valuable, leading to a drop in real

national income. Without a change in central bank and government monetary policies, the dollar

may tend to rise as oil-producing countries’ demand for dollar-denominated international reserve

assets grow. The economic and energy-policy response to a combination of higher inflation,

higher unemployment, lower exchange rates and lower real output also affects the overall impact

on the economy over the longer term. Government policy cannot eliminate the adverse impacts

described above but it can minimize them. Similarly, inappropriate policies can worsen them.

Overly contractionary monetary and fiscal policies to contain inflationary pressures could

exacerbate the recessionary income and unemployment effects. On the other hand, expansionary

monetary and fiscal policies may simply delay the fall in real income necessitated by the increase

in oil prices, stoke up inflationary pressures and worsen the impact of higher prices in the long

run.

While the general mechanism by which oil prices affect economic performance is generally well

understood, the precise dynamics and magnitude of these effects – especially the adjustments to

the shift in the terms of trade – are uncertain. Quantitative estimates of the overall

macroeconomic damage caused by past oil price shocks and the gains from the 1986 price

collapse to the economies of oil importing countries vary substantially. This is partly due to

differences in the models used to examine the issue. Nonetheless, the effects were certainly

significant: economic growth fell sharply in most oil-importing countries in the two years

following the price hikes of 1973/1974 and 1979/1980. Indeed, most of the major economic

downturns in the United States, Europe and the Pacific since the 1970s have been preceded by

sudden increases in the price of crude oil, although other factors were more important in some

cases.

Similarly, the boost to economic growth in oil-exporting countries provided by higher oil prices

in the past has always been less than the loss of economic growth in importing countries, such

that the net effect has always been negative.

Higher oil prices, by affecting economic activity, corporate earnings and inflation, would also

have major implications for financial markets – notably equity values, exchange rates and

government financing – even, as assumed here, if there are no changes in monetary policies:

International capital market valuations of equity and debt in oil-importing countries would be

revised downwards and those in oil-exporting countries upwards. To the extent that the

creditworthiness of some importing countries that are already running large current account

deficits is called into question, there would be upward pressure on interest rates. Tighter

monetary policies to contain inflation would add to this pressure.

Currencies would adjust to changes in trade balances. Higher oil prices would lead to a rise in the

value of the US dollar, to the extent that oil exporters invest part of their windfall earnings in US

dollar dominated assets and that transactions demand for dollars, in which oil is priced,

increases. A stronger dollar would raise the cost of servicing the external debt of oil-importing

developing countries, as that debt is usually denominated in dollars, exacerbating the economic

damage caused by higher oil prices. It would also amplify the impact of higher oil prices in

pushing up the oil-import bill at least in the short-term, given the relatively low price-elasticity of

oil demand. Past oil shocks provoked debt-management crisis in many developing countries.

Fiscal imbalances in oil-importing countries caused by lower income would be exacerbated in

those developing countries, like India and Indonesia that continue to provide direct subsidies on

oil products to protect poor households and domestic industry. The burden of subsidies tends to

grow as international prices rise, adding to the pressure on government budgets and increasing

political and social tensions.

EFFECTS OF RISING FUEL PRICES ON INDIAN CAR INDUSTRY

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%.

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%.

Market shares also went down with the shaking economy.

CRUDE OIL DYNAMICS IN INDIA

Three fourth of India’s energy need is met through fossil fuel. According to International Energy

Agency, coal/peat accounts for 40 per cent of domestic energy consumption. Crude oil and

natural gas account for 24 per cent and 6 per cent respectively. Crude oil import to meet

domestic need is mounting by the year. Experts believe that imports are expected to rise to 90 per

cent of demand by 2013. At present almost 80 per cent of crude oil demand is met through

imports. Oil import bill stood at 159.259 MMT in 2009-10, further rising to 163.594 in 2010-11.

India’s oil import bill accounts for almost one third of the total imports. Almost 70 per cent of

India’s total crude oil imports are from Middle East and North Africa (MENA) region showing

the country’s high reliance on the region for its crude oil needs.

Imports of crude oil and petroleum products:

Year

Imports of Crude

Oil (MMT) % Growth

Average Crude oil

Prices (US$/bbl.)

%

Growth

2003-04 90.434 - 27.98 -

2004-05 95.861 6 39.21 40.14

2005-06 99.409 3.7 55.72 42.11

2006-07 111.502 12.16 62.46 12.1

2007-08 121.672 9.12 79.25 26.88

2008-09 132.775 9.13 83.57 5.45

2009-10 159.259 19.95 69.76 -15.77

2010-11 163.594 2.72 85.09 21.97

Despite efforts to liberalize the oil sector, state owned firms continue to dominate both upstream

and downstream sectors. India has fifth largest refinery capacity in the world. Under the 11th

Five Year Plan, the government aims to promote India as a refinery destination by improving the

competitiveness of the industry.

The Indian Basket of crude oil comprises Oman and Dubai for sour grades and Brent for sweet

grade in an approximate 60-40 ratio. The global prices have direct bearing on the price of Indian

crude oil and any rise in crude oil prices adds to the inflationary pressures. Fuel inflation is on a

rise with brief decline in 2008 when the global prices had plummeted. Inflation in crude oil

contributes to 14.2 per cent of the headline inflation. However, the complete rise in global prices

is not passed on to the Indian consumers. The government compensates the state losses. At the

same time, taxes are levied on oil at various levels. Petrol/gasoline prices were de-regulated in

June 2010 in response to burgeoning budget deficit. Price of diesel, kerosene and LPG are still

controlled by the government. In the Budget 2011, the Central government had announced a fuel

subsidy bill of US$5.2 billion for this fiscal, based on the assumption that oil prices will remain

below subsidy bill is likely to be inflated by US$100 per barrel. However, the oil subsidy bill is

likely to be inflated by US$6.8 billion in the wake of sustained high prices. Consequently experts

believe that the government may not be able to achieve the fiscal deficit target of 4.6 per cent

given the upside risk to oil subsidy amongst other factors.

Rise in crude oil prices also slows down the economy. A study by Morgan Stanley suggests that

crude oil price at US$85 can shave off 0.9 per cent from gross domestic product and at US$100

the drop can be as high as 1.3 per cent. The per capita consumption of oil is a fifth of the global

average leaving a lot of potential for increase. Despite low per capita consumption, the domestic

demand outstrips the supply such that reliance on import is paramount.

The Government has also intensified efforts towards promoting alternative sources of energy.

The nuclear energy production capacity is being aggressively developed after the government

bagged on international civil nuclear co-operation deal. Additionally government is building

strategic petroleum reserves to provide buffer in the time of short supply. The facilities are being

built in Vishakhapatnam, Mangalore and Padur with a total capacity of 36.6 million barrels (5

million metric tons). Underground civil works for Visakhapatnam and Mangalore project are

under progress. According to the U.S. Energy Information Administration, the consumption of

crude oil in India is expected to rise by 1.8 per cent annually between 2007 and 2035 driven by

the transportation sector in the reference case scenario. Consumption is expected to rise to 3.2

mbpd in 2015 to 3.9 mbpd in 2025 and 4.7 mbpd in 2035 far exceeding the domestic production.

The consumption is expected to grow at almost double the rate of growth in production.

Production Outlook for India (million Metric tons):

Year

Crude Oil

Production

(MMT) % Growth

Natural Gas Production

(BCM)

%

Growth

2003-04 33.373 - 31.962 -

2004-05 33.981 1.82 31.763 -0.62

2005-06 32.19 -5.27 32.202 1.38

2006-07 33.988 5.59 31.747 -1.41

2007-08 34.118 0.38 32.417 2.11

2008-09 33.508 -1.79 32.845 1.32

2009-10 33.691 0.55 47.496 44.6

2010-11 37.712 11.94 52.222 9.95

Impact of Crude oil prices on the Indian economy

India is the 7th largest country with the land mass of 3.29 million sq.k.m and second largest in

population of over one billion. It accounts for 16 per cent of the world population. The country

has to produce about one trillion worth of GDP to fulfill the needs of its huge population. In

order to produce this one trillion dollar worth of output, India needs 2.5 million of oil per day

which is 6.5 per cent of total world demand for oil. The share of commercial energy consumption

in total energy consumption has increased from 29 per cent in 1953-54 to 68.2 per cent in 2001-

02. These ever exert demand profound influence on the growth and inflation levels in India.

International oil price assumed to affect the domestic prices. However in India’s case the sharp

increase in international oil prices has not been fully transmitted in to the domestic prices. The

administrative price mechanism had shielded the country from the impact of oil shocks.

India’s crude oil import bill may cross USD100 billion if the global price stays firm at USD 100-

USD 120 a barrel. If that happens, it will upset the delicate fiscal balance, expand deficit,

increase the subsidy bill that continues to bloat year after year and fuel inflationary expectations.

Rising crude oil prices will impact inflation whether the government absorbs the burden or

passes it to the consumer by increasing prices of petroleum products. If the government acts as a

buffer, the oil subsidy bill will rise and affect fiscal deficit. This will indirectly fan inflation.

India's oil import bill in the first 11 months of 2010-11 was USD 85 billion. For the whole year,

it is reported to have reached USD 90 billion. India, which imports nearly 80 per cent of its crude

oil requirement, spent USD 79.55 billion in 2009-10. Rising crude price will lead higher inflation

and higher inflation attracts monetary tightening. Monetary tightening would lead to a squeeze

on aggregate demand, impacting economic growth. This is a major import item and is highly

price inelastic as a result of which it has a strong impact on the economy.

Soaring crude oil prices has impacted the Indian economy to a great extent. India's April-June

growth domestic product (GDP) grew at 7.7% on-year, while the country's fiscal second quarter

(July-September) GDP grew at 6.9% on-year. The Government had lowered the country's gross

domestic product (GDP) growth forecast to 7.25%-7.75% for the year 2011-12 from the original

projection of 9%. The economic situation of emerging economies has remained grim with prices

of crude oil remaining high at or above $105 per barrel for most part of the year.

The price of the Indian basket of crude oil rose from an average of $69.8 per barrel in 2009-10 to

$85.1 per barrel in 2010-11 and further to $118.5 per barrel in April 2011, before declining to

$110.6 per barrel in May 2011 on expectations of weaker global growth. It has also been

identified that a few other key factors, including inflated import bills and highly volatile

commodity pricing in food, fuel and non-ferrous metals, which have affected the Indian

economy.

Oil price shock

The Indian economy imports about 70% of its oil requirements from international markets. This

makes the economy vulnerable to any increases in oil prices in the international markets.

However, the oil prices do not affect the economy homogenously. The services sector is far less

dependent on oil than the industrial sector. In fact, as most of the growth in the economy is

coming from the services sector, the economy and its performance is becoming less vulnerable to

oil price fluctuations. Another reason for the oil-price shocks not being fully effective in India is

the governments administered pricing policies of oil that diffused the hikes by raising subsidy

etc. The obvious shock periods are 1973 to 1974 and 1980, the two shocks that sent the world

into a recession. However, 1990 (the first Iraq war) and the period around 1999 also show

significant oil price hikes.

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 litre is Rs 72.50, following is the break up

for the same :

Basic Price: Rs. 33.35

Excise duty: Rs. 16.55

Education Tax: Rs. 0.48

Dealer commission: Rs. 1.50

VAT: Rs. 6.5

Crude Oil Custom duty: Rs. 2.1

Petrol Custom: Rs 3.54

Transportation Charge: Rs. 8.48

Total price: Rs 72.50

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.

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.

Petro-Products Consumption in India

The list below is the total Petro-Products consumed in barrels per day in India. There may be

some discrepancy between the oil produced or imported and Petro-Products consumed. This is

mainly because of the omission of stock changes.

Petro-Products Production in India

The list below is the total Petro-Products consumed in MMT in India.

Year

Consumption of Petro-Products

(MMT) % Growth

2003-04 107.751 -

2004-05 111.634 3.6

2005-06 113.213 1.41

2006-07 120.749 6.66

2007-08 128.946 6.79

2008-09 133.599 3.61

2009-10 137.808 3.15

2010-11 141.786 2.88

Some 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.

When the price of crude oil rises globally, it has a big impact on India, and in particular its

automobile industry. India is the fourth biggest user of crude oil in the world, importing three-

quarters of it, at a huge cost. Between January and October, 2010 India spent $82.1 billion on

crude oil imports. So when the price rises, there is an instant effect on India’s economy.

A rise in price is transferred to the automobile industries in one of two ways. Either the price of

petrol increases or the government absorbs the price rise, leading to more subsidies to fuel

companies being paid, resulting in a greater fiscal deficit. In turn this indirectly generates a rise

in inflation, and restriction of growth. The Reserve Bank of India commented on the crude oil

price rise, blaming it, along with worldwide uncertainty and slow economic recovery, for

hampering growth in India. Growth for the fiscal year 2011 is only pegged at % by the bank,

down from 8.6% the previous fiscal year.

The other impact is more instantly tangible; the rise in petrol prices. The gas prices rose by 9%, a

record rise, and the eighth time since the government’s economic reforms which deregulated

gasoline in June 2010. Increased petrol prices see motorists switch to different forms of

transport, from cars to public transport or bicycles, which impacts upon automobile sales. If the

cost of running a car becomes too high, people are happy to change the way they move about

their cities.

Even if the public do not abandon car ownership, perhaps because of fears concerning the

reliability of public transport, people are tempted to change to vehicles which run more

efficiently. This particularly affects automobile companies who create larger and more powerful

vehicles. As mentioned before, India imports the majority of its crude oil. Iran is the second

biggest exporter of crude oil to India, and their imported produce is valued at $12 billion.

However, the United States has claimed the European Iranian Trade Bank, which handles the

transactions, is responsible for financing an Iranian nuclear weapons programme. As such, the

United States does not want India to continue pursuing trade with the bank. So India needed to

find a different way to pay Iran, or find an alternative solution, to avoid suffering a crude oil

shortage and further raised prices.

FACTORS THAT INFLUENCE RISE OF PRICES OF PETROL-

Petrol prices in India are fluctuating very frequently in recent past because of many factors as

mentioned below:

Cost of crude oil:

Increase in crude oil prices in the international market is one important factor responsible for

increase in petrol prices in Indian domestic market. Increases international demands, low

production rate and any political disturbances in crude oil producing countries of the world

influence seriously prices of fuels like petrol.

Increased demand:

Strong economic growth of India and other developing countries in Asia have increased huge

demand of petrol and other related essential fuels resulted price hike in petrol in India.

Mismatch of supply and demand:

Indian oil companies face problem to meet demands of petrol with shortage of production and

supply from oil refineries due to high input cost in crude oil price.

Tax burden:

Prices of petrol and other petroleum products vary according to local government policies in

imposing taxes on fuels. Whenever government of India increases tax on fuels the oil companies

in India have no other alternative to increase the petrol price to recover losses and maintaining

marginal profits in oil business in India.

Petrol prices keep rising and falling throughout the year. These fluctuations are due to many

reasons. The single most important long term reason is the variations in the price of crude oil.

The variations in prices of crude oil directly affect the petrol prices. The main reason for the

variations in crude oil prices may be:

Strong global requirement.

Limited production capacity.

Political issues in oil producing countries.

Further the various short term reasons are:

Increasing taxation.

Government Regulations.

Increase in Demand.

The sharp increase in the petrol price has created an alarming situation for the Automobile

Industry. It is witnessing a massive decline in the sale of petrol vehicles. The increasing prices of

petrol has not only adversely touched the life of the common man, but has created a disturbing

situation for the automobile industry itself. The continuous hike in the petrol prices has cast a

shadow on the development of the Automobile industry in India.

This acceleration in the petrol price has put a lot of strain on the demand of automobile cars and

has affected the general growth of the industry. This is the time when the Indian automotive

market is evolving as one of the upcoming consumer market in the world. The top most

automobile manufacturers around the world are keenly exploring the Indian market. The steep

hike in petrol prices has dampened their spirit.

The soaring fuel prices have affected the sales of the automobile cars negatively. The demand for

the luxury cars has receded. This frontal attack on the petrol prices has disappointed the

enthusiastic consumer’s quest for buying shining new cars. There is a lesser flow of new

consumers in the market. People, in general are hesitating to buy a new car due to the increased

expenditure being incurred on petrol. The consumer is left with fewer options and ultimately will

have to settle for a smaller car. The hike in petrol prices has greatly reduced the foot traffic in

The Automobile showrooms.

The rate hike has a detrimental effect on the consumers who at times have to avail car loans to

invest in a new car. High interest rates and hike in petrol prices are leading to major decline in

the sale sector of the automobile industry. The domestic petrol car sales are considerably going

down. The automobile manufacturers have to diversify now and completely focus on

manufacturing diesel vehicles. As a result, lot of extra expenditure has to be done on research

and in developing new technology for diesel and hybrid technology vehicles. . Not even the

launching of new models has been able to attract the consumer, and boost the demand of the

petrol cars. Another way in which consumers can reduce their fuel costs is to purchase a diesel

car rather than a petrol one. Diesel cars are more fuel efficient, and diesel fuel is about 30 per

cent cheaper per litre than petrol.

Petrol Price Rise-The Burning Issue of 21st Century

Continuous rise in the oil prices is creating unrest in the world. This bullish trend of petrol price

in India has worsened the condition of the Indian economy, resulting slowdown in industrial

performance and causing resources scarcity. Rise of petrol prices has also affected international

trade, regular currency fluctuations and political regulations. Unlike European countries, heavily

populated countries like China and India are facing the adverse effect. Due to the critical

situation of petrol price rise, car making entities as well as petroleum distributors like Bharat

Petroleum Corporation and Hindustan Petroleum Corporation have registered loss.

Petrol price rise has further increased ownership cost of a petrol fuelled car. As per the Crisil

Research survey, the ownership cost has increased by 12 to 14 per cent over the past 19 months

due to petrol price rise. Since June 2010, petrol prices have climbed 37 per cent after

deregulation of transport fuel prices. It has compelled potential car buyers to think judiciously

before adding cars to their assets. The result of petrol price rise in India was further exposed by

average car sales in the festive season.

As the difference between prices of petrol and diesel in India is around 40 percent, there is a

phenomenal rise in the demand for diesel-engine cars. Apart from flooding the market with

diesel-engine cars, car manufacturers in India are rolling out diesel version of petrol driven car

models. Despite, the high price of many diesel-engine car models, buyers feel satisfied with the

purchase.

Diesel-engine car market that constitutes 30 percent of the Indian automotive market is expected

to catch up and balance the equation with petrol-engine cars in forthcoming years. Car makers

across the globe are offering discounted cars or presenting several lucrative schemes to get nod

of potential buyers, who are discouraged by petrol price rise.

Marketing divisions of car making companies are making constant efforts due to the reduced

traffic at dealerships. Feeling the heat of petrol price, car makers are introducing small cars in

diesel version to cater to largest segment, middle class of India. Going by the long-term

projections, petrol price along with other fuel prices will slowly stabilise and automotive industry

will again be one of the most productive industries in India.

The reluctance of the government to increase the price of diesel has led to a strange situation -

the demand for petrol cars is declining sharply. The argument that the common man will suffer if

diesel prices are raised and hence only petrol should be made dearer is unjustified. There are at

least 100 million motorcycle owners in India, a figure calculated on the basis of the last 15 years'

sales. And despite four-stroke motorcycles in India offering incredible mileage, this price ise

hurts users of bikes which have petrol engines a lot more than the middle class man driving the

diesel-variant of the Maruti Swift.

Diesel is becoming more attractive as a fuel across Europe too, thanks to the incredible economy

of the next generation diesel engines. But in Europe, diesel is priced on par with petrol. Even

though diesel is cleaner than ever before, petrol-engine cars still have superior performance,

which is why there are no diesel-powered Ferraris or Lamborghinis. In India, getting a delivery

position on a diesel vehicle involves joining a long waitlist. For a petrol Ritz, most dealers will

give delivery the day your loan is sanctioned. Buying a diesel Ritz means at least a month-long

wait. The same is true for the diesel-run Hyundai i20, the Volkswagen Polo or the Nissan Micra.

Rising fuel prices will eventually pinch the wallets of all car and motorcycle drivers. But an

absurd subsidy on diesel is skewing the Indian car market and creating a scenario where the

government robs Peter, the owner of a petrol driven 100 cc motorcycle, to pay Paul, who drives a

massive SUV. This is primarily because of the disparity in the fuel prices. Also, diesel engines

are more fuel efficient, which adds to the economy factor and makes them attractive for end

users who drive a lot. Diesel technology has evolved over the years and today's engines are as

clean and efficient as the gasoline engines, making them equally attractive for customers.

MAJOR CHALLENGES OF INDIAN AUTOMOBILE INDUSTRY

1) Sustaining the growth rate:

There is a potential for much higher growth in the domestic market due to the fact that the

current car penetration level in India is just 7 cars per thousand. The increase in purchasing

power at the top echelon of about 300 million people in the country, where the per capita income

is over US $ 1000, implies that passenger car growth in the domestic market is on the verge of a

major and sustained boom. It is expected that the passenger car market which was 1 million in

2003-2004 can easily cross the 3 million mark by 2015. This can lead to an increase in the size of

the domestic auto-component market from the current level of US $ 9.8 billion (2005-06) to at

least US $ 15 billion by 2015.

2) Need for innovation:

The competitiveness in the sector will largely depend on the capacity of the industries to

innovate and upgrade. The industry will also benefit if they have strong domestic competition,

home based suppliers and demanding local customers. There is no denying of the fact that the

factors like labour cost, duties, interest rate and economies of scales are the most important

determinants of competitiveness.

3) Enhancement of share in global trade:

The global auto component industry is estimated to be US $ 1.2 trillion in value and is likely to

increase to US $ 1.7 trillion by 2015 as per ACMA. Sourcing from low cost countries is likely to

increase from US $ 65 billion in 2002 to US $ 375 billion by 2015. Although India’s exports are

still small (US $ 1.8 Billion in 2005-06 Prov.), it could leverage this off shoring trend and the

quality of its supply base to build dominant top two position in auto component exports from low

cost countries by 2015. A position in the top two would enable India to achieve export of US $

20-25 billion by 2015. This would increase India’s share of world auto component trade from 0.9

percent in 2005-06 to 2-2.5 percent by 2015, inclusive of domestic consumption. Such a high

growth in the Auto component Sector is expected to lead to an additional 750,000 direct jobs in

its sector along-with indirect employment of 1.8 million people over the next 10 years.

CHALLENGES TO GROWTH

In present scenario world over, it is an accepted view that competitiveness is no longer totally

dependent on variables like availability of cheap labour and materials, low interest rates and

fiscal incentives. The sustained competitiveness in industry can come only through improvement

in productivity both of labour as well as capital. This calls for continuous efforts for innovation

by the companies. The industry has identified certain factors which are inhibiting the growth of

automotive sector.

1. Availability – Fuel Price, Fuel quality and Alternative Fuel-

A rapidly growing economy demands more supply of energy. As the UN Agenda 21 states

“Transportation is the major driving force for the growing demand for energy. It is the largest

end-user for energy in developed countries, and the fastest growing one in developing countries”.

Crude oil prices have been increasing and may continue so for a long time due to the speculation

(“fear premium”) on continuing geopolitical instability. So there is an urgent need to think of an

alternate fuel policy. In the above back drop the development of ‘alternative fuel’ has gained

greater importance. The Ministry of Non-Conventional Energy Sources is working on the usage

of Hydrogen as a fuel. The work in this area need to be strengthened and expedited. The policies

which promote the commercial production, distribution and usage of such alternative fuel and the

automobiles using this alternative fuel need to be put in place. Besides the emphasis on

commercialization of the alternative fuel, ensuring the availability of the fuel meeting the

standards of Bharat Stage III and IV in time as envisaged in the Auto Fuel Policy is equally

important. It will be of great help to the industry if the availability of Euro IV fuel can be ensured

across the country prior to the implementation of the emission norms. The Ministry of Petroleum

and Natural Gas has indicated that as per the roadmap provided in the Auto Fuel Policy,

progressive fuel upgradation to Euro-IV equivalent and Bharat Stage-III are

being planned from April, 2010 onwards, to be implemented based on the source-apportionment

studies currently under way. The present Auto Fuel Policy gives a road map till Euro IV stage

and 2010, It is felt that the Auto Fuel Policy beyond 2010 be also drawn now.

PROBLEM STATEMENT:

To do a comparative study of India, with other developing nations, for the impact of deregulation

of Petrol and Diesel prices.

NEED FOR RESEARCH:

Petrol and diesel being an important source of energy for many industries, their pricing is a very

sensitive issue mainly in the developing countries. Their prices don’t just affect the industries,

but also the nation’s economy on the whole. While selling these at loss or at the price purchased

again makes the government lose and it again affects the economy of the nation. India being

among the developing countries, it has similar issues. As there is are constant fluctuation in the

prices of petrol and diesel in India along with the huge difference in the price of petrol and diesel

in the country. The study will help understand its reason better and further find out how similar

issues were dealt by other developing countries. If those measures can be used in India likewise,

if not then finding out measures suitable for India.

SCOPE OF RESEARCH:

This study would help find out what strategies do other developing countries adopt in order to

meet the needs of the pricing. Alongside will help estimate feasible measures for India to create a

state of equilibrium, and ways by which the prices get deregulated in a way that doesn’t have an

adverse effect on the economy.

OBJECTIVE OF THE STUDY:

To find out the current petrol and diesel prices in India, comparing it with other developing

countries.

To analyze how other developing countries cope up with the fuel prices in their respective

countries and if those prices and pricing mechanism be used as it is in India.

To find out suitable pricing mechanism and deregulation of these prices in a way that it does not

affect the economy adversely.

Fossil Fuels are one important aspect of development of a country, as it contributes a lot as an

important source of energy. In order to strive towards development, the industries in the

developing nations use more of these energy resources. Petrol and diesel are among the major

fossil fuels used these days in many industries in working.

Thus, the pricing of these important fossil fuels is a very important aspect in a countries

development. As the prices that are to be set have a great impact on the economy of the country.

So in order to develop the country, its industries have to be made stronger and in order to make

that, petrol and diesel being the power house for major industries have to be priced accordingly.

In order to serve the industries better, many developing countries price them at either 0 profit or

at a discounted rate i.e. subsidy or a regulated price e.g. India.

The pricing of petrol and diesel has always been a sensitive issue, mainly in the developing

countries. India being a diesel centric country, i.e. diesel being used majorly by most of the

industries as a fuel, thus its pricing holds a lot of concern. The transport sector uses diesel as its

fuel largely, so the prices of almost all goods and commodities are based on the prices of diesel.

Even it is being used in other industries influencing the economy greatly such as agriculture,

shipping etc.In order to gain an economic balance India has had regulated price for diesel and

petrol over the years, while lately in 2010 petrol was deregulated.

Petrol being used for transport purposes by the population mainly is used by the middle class and

it bears the load of the subsidy on diesel on its behalf. Petrol prices are hiked in order to

compensate losses on the subsidies given on diesel fuel. But still the public sector companies like

IOCL, BPCL, HPCL etc. are running on losses by providing diesel at a subsidized rate. As this is

promoting the use of diesel as a fuel for private vehicles and automobiles as it comes at a cheaper

price. This further more creates a burden on the companies and is increasing their losses as more

and more people are now switching on to diesel running vehicles.

The government is willing to remove the subsidy but its political and economic constraints keep

limiting its approach. The government has lately decided to remove the subsidy on diesel,

by gradually increasing its prices of diesel by 50 paisa every month. But that attempt by

the government has not been a true success yet. As still it is creating an adverse economic

impact each month and creating a sort of monthly inflation.

REVIEW OF LITERATURE

"Although complete de-regulation is still far away, the partial price increases will have market

participants factoring higher probability of de-regulation," Edelweiss said in a note.

Edelweiss expects ONGC and oil india ltd. to benefit from the government’s move. However,

ONGC is likely to benefit more for any sort of cut in diesel prices, citing lower risks on earnings

in the event of partial de-regulation.

Devang Mehta of AnandRathi is of the view that the market was expecting sort of a calibrated

move in diesel, but this comes as a complete surprise and that is why we are seeing rally in

stocks like BPCL, HPCL, IOC and others. The major beneficiaries would be companies like

ONGC and Oil India.

"We have been advising our clients to buy Oil India very aggressively and it is paying off very

well. Probably the entire oil and gas sector would see some sort of re-rating which is already

happening in the prices since the last 10-15 days," he added

Manish Sonthalia of MotilalOswal Asset Management is of the view that in case of a full

deregulation, ONGC is going to benefit quite a bit. Additionally, the real benefit is going to

come to HPCL and BPCL.

The Government if India (GoI) is considering various options to reduce the subsidy on diesel,

LPG and kerosene. Although full de-regulation is some time away, but analysts feel that the said

move is indeed positive for the oil and marketing companies.

"I don't really think, given the political compulsions of the country, we might see full diesel

deregulation anytime soon," said Sonthalia.

Given the challenges in the oil and gas sector, the government has to balance the short term

approach towards the long term approach. With the spike in diesel prices, in short term inflation

may go up, but if the government is able to cut down on the subsidy bill, it would help abridge

fiscal deficit.

The government's target of fiscal deficit to GDP ratio at 5.3 per cent is a metric that is being

closely tracked by markets, foreign institutional investors and rating agencies.

A case was made by the government, through the Kirit Parikh Committee report, that there is a

need to deregulate petroleum products. The essence of their argument was that these products, in

particular diesel, LPG and kerosene are heavily subsidised and, hence, put tremendous pressure

on the Indian exchequer. If the prices instead are deregulated, they will be brought in tandem

with the international prices which can be beneficial to both the fiscal policy and the consumers

in general. It can be seen that nothing is further from the truth if we look at the petrol prices,

which is the only product which has been deregulated.

The question arises whether the government is actually running a deficit vis-a-vis the petroleum

sector. A macroeconomic view of the petroleum sector gives us an exactly opposite picture.

Surya P. Sethi, former energy adviser to the Planning Commission, estimated the contribution of

this sector through taxes to the central as well as the state governments and contrasted it with the

total subsidies provided by the government. He finds that the tax contribution of this sector is

way more than the total subsidies.

The most recent defence for the price hike has come from Pranab Mukherjee, who says

“Incomplete pass-through of higher crude prices will have an impact on aggregate demand

through higher subsidy expenditure, which is expansionary and can add to inflationary pressure.

If we increase administered prices of petroleum products and reduce fertilizer subsidy, we allow

room for some inflation. If we do not, then the consequent increase in the fiscal deficit will

counter the moderating trend in aggregate demand and push inflation high anyhow. In addition,

there is also upward pressure on wages. [Domestic investment, saving rates, inflow of foreign

capital] post-2008 are gradually regaining their momentum. To some extent, this recovery is

being held back by domestic inflation, which seems to have gained a foothold in the past two

years” [Business Standard, July 07, 2011]

RESEARCH METHODOLOGY

A Research Methodology defines the purpose of the research, how it proceeds, how to measure

progress and what constitute success with respect to the objectives determined for carrying out

the research study.

The research design is given as below –

Exploratory Research: This kind of research has the primary objective of development of

insights into the problem. It studies the main area where the problem lies.

The research methodology for the present study has been adapted to reflect these realties and

helps reach the logical conclusion in an objective and scientific manner.

NATURE OF DATA –

1) PRIMARY DATA –

Data which is collected through direct interviews and by raising questionnaires in this case to a

few car dealers.

2) SECONDARY DATA –

Secondary data that is already available and published. Various internet sites, newspaper,

magazines were searched in order to find information useful for completion of this project.

It can be of internal and external source of data:

1) Internal source –

Which originates from the specific field or area where research is carried out?

E.g. publish brochures, official reports etc.

2) External source –

This originates outside the field of study like books, periodicals, journals, newspapers and the

Internet.

DATA COLLECTION –

1) Primary Data –

Questionnaire –

A set of questions related to the research topic was formulated. Response foreach questions

included in the questionnaire has been collected from the dealers of cars.

2) Secondary Data –

Information from various published resources like SIAM papers and other research bodies were

also used to validate the market figures and cross-validate the data.

Sample size –

The sample size chosen for the study was 20.

Questionnaire –

The questionnaire is formed in such a way that the information required for the study is acquired

from each item i.e. questions. The respondents’ category range from car dealers to customers.

The questionnaire consists of 10 questions out ofwhich 5 questions were asked to dealers and 4

questions asked to customers.

Sampling design –

Selection of study area: India and Dombivli

Selection of sample size: 20

DATA ANALYSIS AND INTERPRETATION

QUESTIONNAIRE TO DEALERS OF WHICH SAMPLE SIZE IS 20 –

1) To what extent does the volume of sales suffer in the wake of a fuel hike?

25%

15%

40%

20%

Sales

30-40%20-30%15-20%10-15%

Nearly 40% of the dealers feel that 15-20% of sales suffer due to rise in fuel prices, while 15%

feel that 20-30% of sales are affected.

2) Does the “rise in fuel prices” phenomenon really affect the decision of a potential car

buyer, according to you?

20%

35%

30%

15%

Affecting Decision

Yes, to a great extentSignificantlyMarginalDon't know-Can't say

Nearly, 35% feel that the fuel price hikes have a significant impact the decision of a buyer.

3) What has been the outcome of these routine fuel price hikes on the sale of petrol, diesel

and CNG variant cars?

20%

35%

45%

Outcome

Sale of petrol carsSale of diesel carsSale of CNG cars

About 45% of dealers think that there is an increase in sale of CNG cars, while only 20% think

that there will be an increase in the sale of petrol cars after a hike in fuel prices.

4) What do you think are the major driving factors for fuel price increases?

35%

45%

20%

Driving Factors

International developmentsGovernment PoliciesInflation

About 45% of the respondents feel that the Government policies are the major driving factors,

followed by international developments having an effect on fuel prices.

5) Do you feel the prices of fuels will stabilize in the future?

30%

55%

15%

Prices of Fuel

YesNoDon't know/Can't say

As much as 55% of the respondents do not think that fuel prices will stabilize in the future, while

30% are hopeful of the prices coming down.

QUESTIONNAIRE TO CUSTOMERS OF WHICH SAMPLE SIZE IS 20 –

1) With fuel prices increasing consistently, what would u prefer - a diesel, petrol or CNG

car?

45%

20%

35%

Type of Car

Diesel carPetrol carCNG car

With increase in the fuel prices consistently, about 45% of the customers would prefer a diesel

car, followed by nearly 35% opting for a CNG variant and only 20% preferring a petrol car.

2) Would u be willing to spend a little more in order to buy a more fuel efficient car?

65%

20%

15%

Fuel efficient car

YesNoCan't say

About 65% of the customers are willing to spend some extra money if they are able to buy a

more fuel-efficient car.

3) What do you think are the major driving factors for fuel price increases?

30%

45%

25%

Driving factors

International developmentsGovernment policiesInflation

Nearly 45% of the customers blame the government policies for rise in fuel prices, followed by

30% believe that international developments and 25% thinking inflation to be the reason.

4) Do you feel the prices of fuels will stabilize in the future?

20%

70%

10%

YesNoDon't know/Can't say

As much as 70% do not think

SUGGESTIONS

Today the world is in the race for taking the oil from the earth. Nowadays, oil level is deciding

one of the most powerful factors in deciding the strength of that particular country. All of them

want to suck the fuel from the earth without worry about the future's life of our new generation.

In my point of view, the people in awareness are the main thing for what today's happening. So

each and every man from the earth should know about this basic knowledge about our

Geographic Nature.

Every one should.

1. Reduce their usage of petrol and diesel vehicle for the short distance.

2. Better to take a walk for this, it also for their health.

3. Try to mingle with our neighbors for traveling, it also give time to share your feelings with

them.

4. Don't encourage the children to go with bike for a shop, just tell his/her to go with their friends

it will increase their friends circle.

5. Gov. is the more responsibility for make awareness of their peoples by giving Advertisement

and announcements through Radios, TV’s, Banners and posters.

6. It is responsible for both Gov. And the people to follow, no can blame the opponent.that the

prices will stabilize in the future.

RECOMMENDATIONS

1) The economy should be able to tide over consistent fluctuating oil prices resulting from global

geopolitical situations, by bringing in adequate measures to sustain the economy from such

crisis.

2) The Government should try and introduce ways so that such hike in prices is not swiftly pass

on to the consumers.

3) The country should be able to increase its own production of crude oil reserves so that it will

not be left dependent on oil producing countries.

4) While increasing its own reserves, it will not only help the country become self-sufficient but

also help it to save valuable foreign exchange from leaving the country.

5) Due to increases in fuel prices it has brought about a change in the production type of vehicles

in India as a lot importance is being given to fuel efficient cars.

6) Introduction of CNG driven cars will help to combat high petrol prices.

7) Use of public transport can be a good way of not being dependent on fuel prices.

8) The Government should try to enter into alliances with friendly countries to try and explore oil

in other countries.

09) The refining capacity of oil should be upgraded by creating more oil refining centers in the

country.

CONCLUSION

One of the most important factors that decide the future of Indian economy is the price of

petroleum products. After all a small increase the price of this has got widespread impact on the

Indian Economy. If the price of petrol increases, it increases the transportation cost of various

products, thereby making the companies to increase the price of these products. This causes

inflation in the Indian market and the performance of the economy is affected. Strong economic

growth of India and other developing countries in Asia have increased the demand of petrol and

other related essential fuels, which has resulted in price hike of petrol in India. The solution lies

in finding an alternate source of energy.

Though the idea is good it is not a practical approach to this heavily discussed issue. Another

solution that can be implemented is to create awareness among public about the need to increase

the use of public transport. This is only viable solution in front of us.

BIBLIOGRAPHY

Books and Journals –

1) The Indian Automotive Industry

2) Determinants of Competitiveness of the Indian Automobile Industry

3) Government Response to Oil Price Volatility

Websites –

1) www.google.com

2) www.siamindia.com

3) www.carazoo.com

4) www.overdrive.com

5) MyPetrolPrice.com

Websites Along with name:-

1. Partial deregulation of diesel prices – economics times

http://articles.economictimes.indiatimes.com/2013-01-17/news/36394078_1_diesel-

prices-oil-india-oil-and-gas

2. Petrol price deregulation and its effects by chintankarnani, insignia consultants

http://news.goldseek.com/InsigniaConsultants/1277442240.php

3. Economics behind oil prices in indiahttp://newsclick.in/india/economics-behind-oil-

prices-india

4. Diesel deregulation to spur inflation

http://www.thesundayindian.com/en/story/diesel-deregulation-to-spur-inflation-

expert/3/33944/