The biggest deterrent for companies, however, is the jump to Bharat Stage VI (BS VI) emission norms, which India will adopt in 2020. Investments required to upgrade diesel engines to BS VI, especially on low margin hatchbacks, is proving to be prohibitively high, making them economically unviable.
Sumit Sawhney, country CEO and managing director at Renault India, said, "It does not make sense investing in small diesel engines for India considering that in less than four years, the market will graduate to Bharat Stage VI. Investment in BS VI diesel engine is much higher vis-a-vis gasoline."
New technologies will have to be introduced to meet emission standards leading to a spike in overall costs. For instance, the sharp reduction in nitrogen oxides (NOx) levels can be achieved through introduction of new technologies such as 'lean NOx trap' (for passenger vehicles) and 'selective catalytic reduction' (for trucks and buses).
C V Raman, executive director of engineering at Maruti Suzuki, said: "It will put a lot of pressure on cost and development. The gap between petrol and diesel vehicles today is Rs 1 lakh; it will go up to Rs 2 lakh when the new regulations come in. The customer will decide if diesel is still relevant for him or not." Raman did not deny the possibility of cutting back on investment on diesel technology. "I won't be able to comment right now if we would be continuing investment in diesel."
Diesel cars, which was once the poster child of all car makers including petrol-dominated companies such as Honda Cars India, have seen a free fall in demand since the past many months even as petrol continue to make a strong comeback. For instance, Maruti's first sub-1 litre diesel engine makes up just 15 per cent of Celerio's total domestic sales with the balance being petrol.
"Our understanding is that by 2020, the small car market will be petrol while diesel will be seen only for large cars and SUVs (sports utility vehicles). That is why Renault is not working on any small diesel engine programme," added Sawhney.
With some new generation petrol-powered cars like Tata Tiago, Maruti Suzuki Celerio and Renault Kwid giving a mileage of 23-25 km per litre, they are on par with diesel counterparts, which cost at least Rs 1 lakh more and are also expensive to maintain.
By 2020, companies will be more inclined to invest in development of newer models than to invest in upgrading engines of existing models to BS VI, which are currently underperforming.
Girish Wagh, senior vice-president (programme planning and project management) at Tata Motors, said, "We are talking to technology partners and suppliers to get clarity on what needs to be done for BS VI. There are two important regulatory changes which are going to happen. One is BNVSAP (Bharat New Vehicle Safety Assessment Program) and the other is BS VI. You will, therefore, have some of our older products getting phased out at these milestones and they will get replaced with new ones."
Tata Motors developed a 1.05-litre diesel engine (its smallest for a passenger vehicle) for the Tiago. However, 70 per cent of the model's sales come from the petrol variant. The case is similar for Honda, which has seen demand shift back to petrol.
"Tiago is a completely new platform and engine so it is capable of meeting both these regulatory requirements when they come up. Our product plan is about which products will get repositioned where and which products will get phased out," added Wagh.
"As diesel vehicles will undergo significant technology changes, the cost differential between petrol and diesel passenger vehicles is likely to expand further. This will widen the payback period for diesel vehicles and adversely impact demand, which is already on a declining trend since FY15," stated an ICRA report.