India’s carmakers favor diesel price hike over tax on diesel vehicles

After lobbying vigorously against the proposed tax on diesel vehicles, India’s carmakers are quietly relieved, despite the recent diesel price hike. As a heavily subsidized fuel, diesel fuel, used primarily by farmers, has recently become popular among middle-class families who are bent on cutting their fuel bills. As a result, diesel-powered vehicles have become the car industry’s sole major growth area.
Carmakers lobbied fiercely against the proposed tax on diesel-powered vehicles for several months, and their efforts paid off when the government imposed a Rs5 (US$0.09) per liter increase on the price of fuel. Despite the hike, petrol remains around 45% more expensive than diesel fuel and the recent price increase actually resulted in a spike in shares: Maruti Suzuki India Ltd., the country’s biggest carmaker, rose by 2.4% while Tata Motors Ltd. rose by 3.3% and Mahindra & Mahindra Ltd. went up by 1.1%.
“The way the price difference between petrol and diesel had grown was not desirable. There was a need for an increase,” said Sugato Sen, senior director of the Society of Indian Automobile Manufacturers (SIAM). “It would have been better to have a smaller increase, but it is still definitely much better than a tax on diesel cars,” he added.
Sale of diesel vehicles in the last fiscal year accounted for 40% of car sales, twice their share in the previous year. But high interest rates and a sluggish GDP growth dampened demand, which means that India’s car sales will most likely fall below industry estimates of 10% growth this year. (September 14, 2012)