By Sudarshan Varadhan and Koustav Samanta
NEW DELHI/SINGAPORE July 12 (Reuters) - India's strongdiesel demand growth is decoupling from the car market asmotorists increasingly turn to gasoline vehicles, leaving itmore reliant on patchy demand from construction and heavyindustry.
A slowdown in demand growth in India -- one of Asia'sbiggest diesel guzzlers -- could add to a persistent glut ofdiesel in the region, fuelled in part by strong exports fromChina, and put pressure on regional refining profit margins.
Transportation has historically accounted for two-thirds ofIndia's diesel use, but a steady decline in diesel's discount togasoline has seen sales of diesel-powered cars fall to a recordlow share of total sales, according to industry body Society ofIndian Automobile Manufacturers (SIAM).
This diminishing draw from autos means diesel demand growthin Asia's third-largest economy could now depend mainly ongovernment and company infrastructure spending, rather thandaily use by an increasingly mobile population.
India's economy grew at its slowest pace in more than fouryears in the March quarter and the risk of a wider fiscaldeficit threatens government spending as private investmentfalls, leaving the outlook for construction activity appearsuncertain over the near to medium term.
The largest drivers of diesel demand growth in India arecommercial vehicles including trucks and public transport, whereconsumption is linked to the overall economy, followed bypassenger vehicles, said K Ravichandran, senior vice presidentat ICRA, a unit of Moody's Investors Service.
"India's diesel demand growth will largely depend on theperformance of the economy, now that diesel passenger vehicleshave become less glamorous as the price differential with petrolis coming down," Ravichandran said.
GEAR SHIFT
Diesel-powered cars accounted for 19% of total car sales inIndia in the 2018/19 financial year, compared with nearly 50% ofsales in 2012/13, according to SIAM.
That drop in diesel-fuelled auto sales in turn contributedto slower diesel consumption growth, from roughly 7% annuallyfrom 2010 through 2013, to 3% for 2018-19, according to datafrom the Ministry of Petroleum & Natural gas.
Industry executives expect diesel sales to continue tostruggle as diesel's historical price advantage to gasolinediminishes. In 2010, diesel traded at a roughly 23 rupees($0.33) per litre discount to gasoline, but is now less than 7rupees cheaper, according Petroleum Planning and Analysis Cell,a think-tank attached to the federal oil ministry.
"The motivation for owning a diesel vehicle is basically thepricing. With that price differential reducing, there is goingto be a preference for petrol vehicles," said M K Surana, thechairman of India's third largest state refiner HindustanPetroleum Corp Ltd
Surana expects diesel demand to grow 2.5%-3% in 2019/20,below the India's petroleum ministry's initial projections of3.5%.
The auto sector also expects diesel to struggle. MarutiSuzuki India Ltd, India's biggest automaker, will stopmaking diesel cars next fiscal year, blaming uncertain fuelprices and stricter emission standards.
Mahindra and Mahindra Ltd, India's third largestautomaker, plans to stop production of some diesel vehicles.
Beyond diesel, India's overall auto sales have beensluggish, recording the slowest pace of growth in four years in2018-19, according to SIAM.
FARM SECTOR SLOWDOWN
At the same time, a renewables push across the farm sectorcould cut diesel use in irrigation pumps if the governmentfollows through on plans to boost solar generation capacity.
In February, India approved subsidised sales of solar pumpsto millions of farmers, which it expects will cut diesel demandby about 1.1 million tonnes a year. The country consumed 83.5million tonnes of diesel in 2018/19.
The government's ambitious target for electric vehicles tomake up 30 percent of auto sales by 2030 may also dent dieseldemand.
Still, over the longer term India's overall growthtrajectory is expected to underpin fuel demand.
"Strong economic momentum should support industrial/freightactivities, providing further impetus to long-term gasoil demandgrowth," said Sri Paravaikkarasu, director at Singapore-basedconsultancy FGE.($1 = 68.5725 Indian rupees)
(Writing by Nidhi Verma; editing by Gavin Maguire and RichardPullin)