A Study on Impact of Crude Oil Prices on Indian Economy With Special Reference to Automobile Sector

A STUDY ON IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY WITH SPECIAL REFERENCE TO AUTOMOBILE SECTOR  “MASTERS OF MANAGEMENT STUDIES”

SUBMITTED BY: ROLL NO. P-21 Batch: 2011-2013 SPECIALISATION: FINANCE DR V. N. BEDEKAR INSTITUTE OF MANAGEMENT STUDIES THANE

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STATEMENT BY THE CANDIDATE

I wish to state state that the work embodied in this Project titled Study on Impact of  Crude Oil Prices On Indian Economy With Special Reference To Automobile Sector

forms my own contribution to management. Wherever references have been made to intellectual properties of any individual / Institution / Government / Private / P ublic Bodies / Universities, research paper, text books, reference books, research monographs, archives of  newspapers, corporate, individuals, business / Government and any other source of  intellectual properties viz., speeches, quotations, conference proceedings, e xtracts from the website, working paper, seminal work et al, they have been clearly indicated, duly acknowledged and included in the Bibliography.

 ________________________ Guide Signature

_____________________  Signature of Candidate

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STATEMENT BY THE CANDIDATE

I wish to state state that the work embodied in this Project titled Study on Impact of  Crude Oil Prices On Indian Economy With Special Reference To Automobile Sector

forms my own contribution to management. Wherever references have been made to intellectual properties of any individual / Institution / Government / Private / P ublic Bodies / Universities, research paper, text books, reference books, research monographs, archives of  newspapers, corporate, individuals, business / Government and any other source of  intellectual properties viz., speeches, quotations, conference proceedings, e xtracts from the website, working paper, seminal work et al, they have been clearly indicated, duly acknowledged and included in the Bibliography.

 ________________________ Guide Signature

_____________________  Signature of Candidate

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ACKNOWLEDGEMENT

In the first place, I thank  Ms. S. S. Jape, Assistant Professor , Department of Business Management, Dr .V. N. BRIMS Thane for having given me her valuable guidance for the  project. Without her help it would have been impossible for me to complete the project.

I would be failing in my duty dut y if I do not acknowledge with a deep sense of gratitude the sacrifices made by my parents and thus have ha ve helped me in completing the project work  successfully.

I would be failing in my duty if I do not acknowledge with a deep sense of gratitude the sacrifices made by my parents and thus have ha ve helped me in completing the project work  successfully.

Place: Mumbai Date:

Prashant Taralkar 

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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 no t 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.

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GENISIS

India –  India – aa country diverse in culture and religion, strong in will –  will  – and and manpower, large in size and opportunities has become a highly wooed automobile market. Despite the impact of the financial and economic crisis, India‘s automobile economy is booming. Due to the unsteady global situation with respect to the crude oil sector, various sectors of industries were affected. In this project, I have tried to judge the impact of the rising and fluctuating crude oil prices on the Indian Automobile sector. On the analyses, it is found that the impact of such a crisis is not as severe on the Indian economy as it is on the global economy. The automobile sector in India has shown considerable silence while dealing with increasing fuel prices resulting from highly unsteady global situation.

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TABLE OF CONTENTS SR  NO

TOPICS

PAGE NO

1

OBJECTIVE OF THE STUDY

07

2

 NATURE & SCOPE OF PROJECT

8

3

RESEARCH METHODOLOGY

9

4

INTRODUCTION

11

5

INDIAN AND GLOBAL OIL SCENARIO

12

6

IMPORT DEPENDENCE AND ITS IMPACT

15

7

AUTOMOBILE INDUSTRY IN INDIA

19

8

IMPACT OF HIGHER OIL PRICES ON THE GLOBAL ECONOMY

23

9

EFFECTS OF RISING FUEL PRICES IN INDIAN CAR INDUSTRY

26

10

CRUDE OIL DYNAMICS IN INDIA

27

11

RECOMMENDATIONS

54

12

CONCLUSION

55

13

BIBLIOGRAPHY

56

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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.

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NATURE & SCOPE OF PROJECT

The project entitled ―A Study on Impact of Crude Oil Prices on Indian Economy with Special Reference to Automobile Sector‖ 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.

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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 c arried 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.

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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: Thane and Dombivli Selection of sample size: 20

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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.

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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, 12 | P a g e

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.

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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 200506.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. 14 | P a g e

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.

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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

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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 nondomestic 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 17 | P a g e

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.

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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.

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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

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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

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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.

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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 oilexporting 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 23 | P a g e

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.

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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.

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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.

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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 2003-04

Imports of Crude Oil (MMT) 90.434

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

95.861 99.409 111.502 121.672 132.775 159.259 163.594

% Growth -

Average Crude oil Prices (US$/bbl.) 27.98

% Growth -

6 3.7 12.16 9.12 9.13 19.95 2.72

39.21 55.72 62.46 79.25 83.57 69.76 85.09

40.14 42.11 12.1 26.88 5.45 -15.77 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 27 | P a g e

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.

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Production Outlook for India (million Metric tons):

Year

Crude Oil Production (MMT)

2003-04

% Growth

Natural Gas Production (BCM)

% Growth

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 200102. 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 100USD 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, 29 | P a g e

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.

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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. 31 | P a g e



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.

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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 threequarters 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.

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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:

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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

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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 36 | P a g e

across the globe are offering discounted cars or presenting several lucrative schemes to get nod of potential buyers, who are discouraged b y 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.

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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 peop le over the next 10 years.

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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.

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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?

Sales

20%

25% 30-40% 20-30% 15-20% 15%

10-15%

40%

 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?

Affecting Decision

15%

20% Yes, to a great extent Significantly Marginal

30%

Don't know-Can't say 35%

 Nearly, 35% feel that the fuel price hikes have a significant impact the decision of a buyer. 40 | P a g e

3) What has been the outcome of these routine fuel price hikes on the sale of petrol, diesel and CNG variant cars?

Outcome

20% Sale of petrol cars

45%

Sale of diesel cars Sale of CNG cars 35%

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?

Driving Factors

20% 35%

International developments Government Policies Inflation

45%

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. 41 | P a g e

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

Prices of Fuel

15% 30% Yes No Don't know/Can't say 55%

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.

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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?

Type of Car

35% 45%

Diesel car Petrol car CNG car

20%

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?

Fuel efficient car

15%

Yes No

20%

Can't say 65%

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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?

Driving factors

25%

30%

International developments Government policies Inflation

45%

 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?

10% 20%

Yes No Don't know/Can't say

70%

As much as 70% do not think that the prices will stabilize in the future. 44 | P a g e

LPG GAS PRICES IN INDIA –  LPG is Liquefied petroleum gas which is a mixture of hydrocarbon gases. LPG is used in motor  fuels, refrigeration, cooking, etc. About 17.5% of Indian households use LPG gas as cooking fuel according to 2001 census of India. But the urban people used it as the rural could not afford the  prices. In Hong Kong it was the most popular cooking fuel but it subsequently reduced to 24% due of expansion to town gas to buildings. For the urban Brazilian households it is the most common cooking gas. Product

Price as on 1st Apr 2012

Diesel

46.25/litre

Price as on 18th Jan 2013 53.71/litre

Petrol

70.66/litre

74.00/litre

4.72

CNG

32 Rs/Kg

33.95 Rs/Kg

6.09

Auto Gas

53.52 Litre

51.13 /Litre

-4.46

% change

16.12

The LPG gas price in India is one of the major concerns for some years.

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INDIA’S OIL AND GAS: A SCENARIO Oil and gas sector is one of the key catalysts in fuelling the growth of Indian economy. With a 1.2 billion population and an economy that has consistently at approximately 8 per cent annually, India's energy needs are increasing fast, warranting a robust demand for oil and natural gas in the country. India has emerged as the 5th largest refining country in the world, accounting for 4 per  cent of the world's refining capacity. India exported 50 million tonnes (MT) of refined petroleum  products during 2010-11. With our refining capacity increasing further, this figure is likely to touch about 70 MT by 2014, making India one of the world's major exporters of petroleum  products. The share of oil and natural gas in India's total primary energy demand is 40 Per cent. The  planned investments span across the oil and gas value chain including exploration and  production, oil and gas pipelines, petroleum refineries, R-LNG terminals, city gas distribution networks and petrochemical plants. With an enriched resource position, India ranks second in BMI's upstream business environment ratings while India shares first place with China in BMI's downstream business environment ratings. India will account for 12.4 per cent of Asia Pacific regional oil demand by 2015, while satisfying 11.2 per cent of the supply, as per the BMI forecasts. In addition, India is also the world's fourth largest importer of oil. The petroleum and natural gas industry in India has attracted foreign direct investment (FDI) worth US$ 3.280.72 million from April 2000 to September 2011, according to the data provided by Department of Industrial Policy and Promotion (DIPP). The Department further recorded US$ 144 million during April –  September 2011-12, in the industry. Oil & Gas- Market Dynamics – 

Production and Consumption From about 22 million tonnes per annum (MTPA) during 2004-05, the import of crude oil from the African continent has increased to more than 35.31 MT during 2010-11. Investment in oil and gas sector over next 5 years is expected to reach US$ 65- US$ 70  billion.

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According to the provisional production data released by the Ministry of Petroleum and Natural Gas in a press release: 

Crude Oil production was recorded at 22.44 million metric tonnes (MMT) for AprilOctober 2011, as compared to the 21.54 MMT in April-October 2010.



 Natural Gas production was 28,431.4 million cubic metres (MCM) during April-October  2011.



During April-October 2011, 96.95 MMT of crude oil was refined, compared to 93.58 MMT of oil refined during corresponding period in 2010.

Oil consumption in India is projected to increase by 4-5 per cent per annum by 2015, indicating a demand of 4.01 million b/d by 2015. Diesel & Petrol

India's fuel demand may rise 3.8 per cent in 2012 led by diesel and petrol (gasoline), as per  International Energy Agency‘s (IEA) forecast. Diesel comprises for about 40 per cent of the total fuel consumption in India. Its demand is expected to increase to 1.37 million b/d in 2011 rising  by 5.8 per cent and further to 1.44 million b/d in 2012, increasing by 5.5 per cent. India's petroleum refining capacity is expected to rise to 240 MTPA by March 2012 from the current 188 MTPA, attracting an estimated investment of US$ 13.5 billion - US$ 14.6 billion. This will boost the country's exports of petroleum products, according to Mr S Sundereshan, Secretary, Ministry of Petroleum and Natural Gas. Moreover, demand for petrol is expected to expand by 7.6 per cent (363,000 b/d) in 2011 and eventually by 6.7 per cent (388,000 b/d) in 2012. The Ministry of Petroleum anticipates a growth of 4.6 per cent in the sale of oil products in the FY12. Gas

The natural gas demand in India is expected to increase from current 166 million standard cubic meters per day to 320 million standard cubic meters per 106 day by 2015, as per Global consultancy firm McKinsey's analysis.

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India's share (in the Asian pacific region) of gas consumption in 2010 was an estimated 10.9 per  cent, while its share of production is estimated at 11.1 per cent, according to BMI's Q3 2011 report. BMI expects that the India's share of gas consumption would reach to 11.7 per cent by 2015 while that of supply would stand at 13.1 per cent. Gas consumption is expected to increase from an estimated 55 billion cubic metres (BCM) in 2010 to 76 BCM in 2015, while domestic production is anticipated to increase from around 45 BCM in 2010 to at least 73 BCM in 2015. Addressing the Challenge of Volatility in Fuel Prices

One of the major challenges of the world automotive industry is the volatile oil prices. The year  2008 witnessed crude oil prices breaching the US $ 140 mark per barrel, and thereafter slipped  below US $ 40, in the later part of the year. The volatility in oil prices does not directly affect the growth in automotive industry; however, volatility in oil prices is one of the influential factors in automobile demand. In order to address the challenge of volatility in oil prices, the automotive industry is innovating new technologies and inventing usage of alternative energy. Hydrogen cars, driven either by a combination of fuel cells and an electric motor; hybrid electric technology; electric vehicles with rechargeable batteries; or alternatively, compressed air  technology to drive the pistons in a specially designed engine, are thought to be replacing fossil Fuel powered motors in the decades to come. Emergence of New Generation Automobiles  – 

Innovation is expected to drive the automotive industry in future as the producers are involved in differentiating their products and services. There are already growing interface of electronics and IT in the automotive functionalities, such as entertainment, navigation and safety. According to a survey, conducted by IBM across the auto majors, majority of them felt that by 2020 the level of  innovation would be greater in software and electrical systems of automobiles. It is also expected that by 2020 the vehicles may become another node on internet, connecting with other vehicles, the transportation infrastructure, homes and businesses. However, there are challenges associated with this trend, with regard to consumer acceptance, technological development and adoption of  standards.

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Growing Small Car Segment – 

The volatility in crude oil prices witnessed during the year 2008 re-emphasized the need for  small and fuel-efficient vehicles. Some of the automobile majors have plans to hike their R & D  budget for designing of small and fuel efficient vehicles. Added to this is the need for reduction in prices to target the middle income groups of population / new buyers, especially in developing countries like India, where the vehicle penetration is low as compared to the population. An auto research firm CSM Worldwide Inc. has estimated that global demand for small cars would grow by 30% per annum to 27 million vehicles a year by 2013. The fast-growing small cars market has encouraged several global Auto majors (such as Renault, Toyota, and Nissan) to  plan for launch of small cars. Trendy Cars, Shorter Life-spans  – 

An automobile is a highly engineered collection of complex components, each of which has its own lifespan and longevity characteristics. While some components require frequent replacement, others that are relatively expensive are expected to have longer lifespan to justify the economics of a vehicle buyer. However, change in fashion and design trends may outweigh the pure economics, which may lead to planned obsolescence. In the world of changing fashion trends, auto manufacturers are developing new designs meeting the changing consumer   preferences. More frequently the new models are introduced, the shorter will be the life span of  the old models. Preserving Brand Identity  – 

With growing mergers and takeovers in automobile industry, players are carefully devising strategies to strengthen the backroom operational synergies, in terms of common logistics and supply chain management, but avoid losing the brand identities. A group owning different brands  prefers not to use the same platform that has same kind of technology, management, and designers to preserve the brand identity. In this sense, the automobile sector is different from monolithic branding strategies of consumer goods.

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Emergence of Design Studios  – 

As efficiency in design and manufacturing improves, vehicle manufacturers across the world are focusing on making models for niche market, though the sale would be in lower volume. This is in contrast to the earlier strategy of designing models for mass consumption. With the increase in number of models to be designed and developed, auto majors are outsourcing the designing jobs to independent design studios who take care of the design and execution of the process management in the value chain. Export competitiveness of Indian Automobile industry

The year-on-year growth rates in vehicles production achieved by the Indian automobile industry have been outstanding as compared to the growth rate achieved by the global automobile industry. In the year 2007, the automobile production growth rate in India stood at around 14% as compared to the world production growth rate of 5.4%. Except in the year 2000, when there was a slump, the Indian automobile industry has performed better than the global average, at the  back of both domestic as well as global demand.

Into Asian markets – 

India‘s automobile penetration in the developing Asian market has been quite modest across all the segments. This could be seen from the growing penetration index during the analysed period (years 2001 and 2006), in almost all segments. The contribution index has also grown in all vehicle segments (except motor vehicles for transport of goods, which has remained constant), indicating growing share of these vehicle segments in India‘s exports to developing Asia. However, the share of import of identified categories of vehicles in total import of developing Asia has declined over the analysed period, in most of the sub-categories, indicating growing manufacturing and self-sufficiency in the region. In spite of such a trend, the specialization index has grown for all types of vehicles, with some categories, such as tractors, and chassis fitted with engines, well pronounced than the others.

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Fuel Price Volatility – 

Volatility in fuel prices affects the growth of the automotive industry all over the world. The effects of volatility in fuel prices are multipronged. Firstly, the cost of inputs in car  manufacturing increases with the increase in oil prices. Polymers, one of the inputs used in manufacture of vehicles, are a derivative of crude oil. Bulk commodities, such as steel and aluminum, are also used in manufacture of vehicles; the transportation cost of which is influenced by oil prices. Secondly, the oil price has an impact on inflation, affecting the saving and disposable income of the consumers, thereby affecting the demand for automobiles. Thirdly, the fuel price influences the overall running cost of the vehicle owners; there could be switch in demand among the vehicle variants, as also research in use of alternative fuels. Thus, the volatility in oil prices affects the prospects of the industry. Growing Competition – 

Competition in India‘s automobile and auto-parts industry has been growing in the recent years. Earlier, the regulatory framework and market conditions positioned the Indian OEMs in monopolistic or oligopolistic market structure. As the automotive market in India is evolving through the dynamics of open market and deregulation, many new players have entered the market. Since liberalization, over 20 new  players entered the market in the passenger car segment alone. Though, there has been depletion of market share for Maruti Suzuki, it still dominates the passenger car segment. In the twowheelers segment too, foreign majors have their presence through joint ventures as also through their wholly owned subsidiaries. Hero Honda is the largest player in the two-wheeler segment, followed by Bajaj Auto and TVS Motors.

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Findings of research

The research was conducted in the form of a questionnaire which was asked to a few car dealers and also to some customers. Out of the questions that were asked, it can be understood that the dealers suffered a great deal whenever there is an increase in the prices of fuel.  Nearly 40% of the dealers felt that the fuel hikes impact to about 20% of the volume of sales affecting the profit margins. They also feel that as an effect of rise in fuel prices, the sale of CNG cars might increase by around 45%. The customers also said that they would not mind paying more if they are able to get a fuel efficient car. They would also not hesitate to use public mode of transport if there is consistent hike in prices. The effects can be said as under  – 

Inflation will rise. There is no doubt over the same. In the short term and medium term overall inflation will rise. But in the long term the higher base effect will negate all the rise. Private sector oil companies and oil marketing company‘s margins will rise. Effect of deregulation of petroleum prices  – 

In June, after recommendations from several expert groups, the government deregulated petrol  prices while maintaining status quo on other sensitive petroleum products with partial price revisions. Since then, marginal price changes have been effected on sensitive petroleum  products. In spite of periodical price revisions, there is an under-recovery to oil companies across all the sensitive petroleum products. In the current fiscal year, oil marketing companies are estimated to record a revenue loss of Rs72, 000 crore. As per the agreed one-third sharing formula, till date the government has reimbursed Rs24,000 crore in two tranches and another Rs14,400 crore has been paid by upstream companies by way of discounts. Oil marketing companies are not in a position to bear more than Rs12,000 crore of  revenue losses and the government would have to compensate the overall shortfall of Rs36,000 crore. Deregulation of prices is, therefore, critical. This will require revamping the tax structure, which today constitutes 25-45% of the selling price of the fuels. In parallel, the government and the 52 | P a g e

 petroleum and natural gas regulatory board need to provide a renewed thrust to the development of city gas distribution projects, the creation of a national gas grid, and incorporation of natural gas in the proposed goods and services tax (GST) reform. This will enable a shift in the energy mix from the scarce and price-volatile oil to the relatively abundant natural gas. The energy  policy will need to continue to provide fiscal stimulus to the supplementary effort for induction of energy efficiency programmes and expansion of renewable sector. Energy efficiency is expected to yield significant lowering of petroleum requirement per capita of gross domestic  product (GDP).

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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.

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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.

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