I have owned this car for a year now. I drive about 45+ kms a day - in a mix of highway and city (congested) roads. My fuel average is between 14 and 17 kms to a litre of diesel (IOC Premium) with A/C on. Pure city driving (especially in the stop-and-go traffic in the congested streets of Koramangala, Bangalore) - gives around 12-13 kmph.
I find the boot space to be very, very spacious. I have found that no other hatchback - provides as much space. If you fold the rear seats, you can pretty much fit a lot of bags, luggage, etc.
Driving is a pleasure. NVH levels are at a minimum. Compared to other diesel hatchbacks, this is the best one that is currently available. The 1900 cc engine provides awesome power. I sometimes ride the Ford Flair and the WagonR - and find them to be underpowered. The Tata Indica is no match for this car.
There are couple of things you need to un-learn - especially if you have been driving petrol cars. This car is torquey. Which means that you should not rev the engine a lot. Since all versions of the Palio diesel come with a RPM meter, you should make sure that you do not cross the 15x1000 - 20x1000 rpm mark. If you are at that mark, you should move to the next gear. Try to be in the 5th gear, by 50 kmph speed.
The car has a very very smooth handling. Once you are seated inside, it is difficult to tell that you are inside of a diesel car. Gear shifts are extremely smooth. There is tons of space in this car. 3 fullsized adults can easily sit in the back seat. You can take the car for long (really long) drives. It is very spacious. The A/C is a chiller.
My first service cost me about Rs 600. Also, the service center at Sundaram (Kasturba Road, Bangalore) provided awesome repairs for a few dents on the fender of my car.
Overall - my experience has been very satisfying. I would strongly recommend any one looking to buy small hatchback to test-drive this car before making a decision.