Diesel consumption in July fell 12.7% but shouldn’t ring alarm bells, say experts

Diesel consumption is considered a good indicator of economic health of a country

Diesel consumption, a bellwether of economic health, saw a 12.7% decline in July this year compared to the preceding month mainly because of demand constraints, heavy rains in various parts of the country and weekend lockdowns still prevailing in several areas.

Drop in sale of vehicles may have also contributed to the slump in Diesel consumption.(Vipin Kumar/HT PHOTO)

While the consumption of diesel in July this year dropped to 5.5 million metric tonne (MMT) compared to 6.3 MMT in June 2020, overall consumption of petroleum products also saw a 3.7% drop at 15.7 MMT in July 2020 compared to 16.3 MMT in the previous month, according to oil ministry’s data keeper petroleum planning and analysis cell (PPAC).

Consumption of diesel has witnessed an encouraging year-on-year ease in contraction from -55.5% in April to -29.3% in May and -15.4% in June after the lockdown was gradually relaxed from June 1. The trend, however, saw a reversal in July with a 19.3% contraction.

Experts, however, said that the demand for diesel usually decreases in the monsoon months of July and August, hence the positive trend of economic recovery that continued after ‘Unlock 1.0’ will sustain in coming months with the resumption of more and more business activities . The country had been under a 68-day lockdown since March 25. It started opening up gradually from June 1, with ‘Unlock 1.0’. The Union government on June 29 issued guidelines for ‘Unlock 2.0’ to lift more restrictions, imposed to stop the spread of Covid-19 pandemic, effective for a month from July 1.

Ram Singh, professor at the Delhi School of Economics said a drop in diesel demand in July 2020 compared to June 2020 does not indicate any major blip in the ongoing economic recovery, which will continue to improve in the coming months. “Diesel consumption saw a jump in June because of a pent-up demand after the lockdown... Besides, the onset of monsoon in July also reduced demand for diesel [for irrigation],” he said.

SC Sharma, an energy expert and former officer on special duty at the erstwhile planning commission, said, “High consumption of diesel in June occurs due to harvesting and to some extent due to DG [diesel generator] based electricity demand. However, as monsoon enters, the agriculture and power demand is largely met by monsoon water as also wind power and hydro power. Accordingly, diesel demand goes down by 15% to 20% during July, August every year.”

According to the latest ‘Industry consumption Report’ published by PPAC, “certain restrictions at state and district levels coupled with a lower demand for products and services” moderated the speed of recovery of diesel consumption to the pre-Covid level. Diesel consumption in July 2019 was 6.8 MMT.

The report pointed at key factors affecting diesel consumption in July. “Unlock 2.0 has carried forward the economic recovery but at a moderate pace. Most of the industries across states are operating at 70 to 80% capacity due to a subdued demand,” it said.

Weekend lockdowns and other restrictions imposed by state and district administrations to curtail the spread of Covid-19 have also affected the consumption of diesel, it said. While rural demand on account of agriculture related activities continues to drive consumption growth, floods in Bihar and certain north eastern states have also affected consumption, it added.

The report said diesel consumption in July 2020 was also affected by other factors such as slow growth in sales of commercial vehicles and a decline in port traffic. “Commercial vehicle sales as reported by individual companies are showing a slow pace to recovery. Major automobile companies have reported a fall in sale of M&HCV [medium and heavy commercial vehicle] by about -70% and of LCV [light commercial vehicle] by about -30%,” it said.

According to the report, the traffic handled at major ports in India fell by 13.2% and collectively they handled 51.5 MMT of cargo during July 2020 as against 59.3 MMT handled during the corresponding period of the previous year.