Gurumoorthy N

F13084 Section - B

MANAGERIAL ECONOMICS ASSIGNMENT - I

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The Domino effect of diesel price hike
Introduction:
Diesel is one of the most quintessential commodities for any country in this day and age. It is
chiefly used in Transport, Agriculture, Power generation and Manufacturing. If diesel price
increases it will be followed by an inflationary spiral i.e. increase in price of food, apartment
maintenance charges and bus fare.
Why Diesel price increases?
The increase in price of diesel is due to partial deregulation of diesel prices by the
government to reduce its subsidy burden and to keep the countrys fiscal deficit under
control. The diesel price hike is also due to falling Indian rupee. Its impact is felt by many
who are a part of diesel economy. Diesel demand in India with respect to price is considered
to be inelastic. Which means when there is an increase in price demand doesnt decrease.
Also diesel cannot be substituted easily because diesel engines cant run on any other fuel.
Thus the demand for diesel is retained.
Problem to be addressed:
How increase in diesel price affects common man in all spheres of life? How it becomes a
constraint in common mans budget?
Assumptions made:
Consumers income remain constant.
There will be a continual demand for diesel powered automobiles and generators.
Resources for producing diesel are scarce.
Price of diesel will not decrease.

Various impacts of Diesel price hike are:
Impact on Maintenance charges:
India is facing peak power deficit and diesel is largely used to provide backup power supply.
Since diesel price increases residents of the apartments will have to shed extra money for
back-up power provided. Thus it affects urban households.

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Impact on Monthly Grocery Bill:
Diesel is predominantly is used to transport raw materials which will be used to produce
goods & services and also to transport the finished goods across the country. So if diesel
price increases the cost of Fast Moving Consumer Goods like Detergents, Soaps, Shampoo,
Deodorants and Toothpaste are expected to increase. Thus it will have a direct impact on the
monthly budget of common man and also it will tighten consumers budget constraint.
Impact on Price of a meal:
Another chief consumption cluster of diesel is Farmers. They use diesel to irrigate their lands
(Pump sets), Cultivate (Tractors) and Transport agricultural outputs. Thus increase in diesel
price will be a setback for farmers or they will be forced to increase the price of their crops
and vegetables which in turn will increase the price of a common mans meal.
Increase in diesel price has become a major concern for fishermen who use diesel powered
fish trawlers to go into the sea to catch fish. Because of hike in diesel price, most of the fish
trawlers gets anchored in the shores. Because of low supply and high demand, price of fish
in an unregulated market would rise.
Impact on Shopping Budget:
Since shopping malls also depend on diesel powered generators Shop owners have to pay
more rent. This might increase parking charges and food prices.
Impact on Mobile bill:
Many mobile towers in the country run on diesel generators. Increase in price of diesel will
increase mobile companys operating cost and to absorb it some part of the expense might be
passed on to customers by increasing the mobile tariffs.
Impact on Labour Jobs:
Increase in diesel price could be a mortal blow to many of the Small scale industries. Since
guaranteed power supply has become rare they need to operate on diesel generators. Many
small business owners are burdened with lack of power supply, increase in diesel price might
force them to shut their units which in turn causes many labourers to lose their jobs.


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Impact on Transportation Budget:
Increase in diesel price might increase common mans budget for commutation. Increase in
Public transport Ticket fares might burn a hole in common mans pocket. Also Families
which own diesel cars have to spend more as fuel expenditure.
Impact on Diesel Car Market:
The narrowing gap between petrol and diesel price might reduce the demand for diesel cars.
So companies which have invested a lot in building diesel car manufacturing plants will
suffer a great deal due to less demand. The break even time is prolonged for those who have
bought diesel cars recently which could alter peoples preferences.
Alternatives:
Start using Compressed Natural Gas which is an environmentally clean alternative.
Use of Bio-Diesel with low or no alteration to your already existing diesel powered
vehicles.
Solar power generators can be used to provide backup power.
Solution:
By using CNG we can reduce our dependency on diesel thereby reducing its demand. So both
public and private transport can start adopting to CNG fuel. For those who already own a
diesel vehicle can convert it into CNG or Bio-diesel powered vehicle. It minimizes their
expenditure on fuel thereby decreasing the prices of various other commodities. Solar Energy
is abundantly available in India and if companies could readily tap it their profit will get
maximized.
Constraints to alternatives:
Cost of conversion of diesel vehicle to CNG vehicle is a barrier for many.
High investment and huge labour force is required for bio-diesel plants.
Government support and subsidy is essential in procurement of bio-diesel seed.
Lack of Proper awareness regarding bio-diesel amongst the people.
Setting up of Solar panels is costly and large area is required to generate backup
power.

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Conclusion:
Price of crude oil is tough to control and it is difficult for government to continue giving
subsidy. So to keep things under our budget its better to reduce the consumption of diesel by
turning to alternative energy sources like CNG or Bio-diesel which is both cost effective and
environmental caring.