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Avneet Jolly and Anupam Prakash
ASIA: "The Indian and Chinese Automotive Components Markets" report. 14-page report by A.T. Kearney.
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backASIAtalk March, 2012
India: Carmakers likely to speed up diesel engine plans
The Budget's excise duty hike might have dampened the spirits of automakers a tad but this was a better option than the rumoured levy on diesel cars which had them spooked.
The fact that the Government chose to steer clear of such a move reflects its intent to fix the subsidy on diesel pricing. This also explains why it replaced the Rs 15,000 additional levy on cars, with engine capacities of over 1.5 litres, with a more direct 27 per cent duty.
Carmakers will now be more inclined to fast-tracking their investments for diesel engines. They had put these on hold when talks of a levy on diesel cars began doing the rounds. With no chance of this happening now, the likes of Maruti, Hyundai and Volkswagen will now get going with their (diesel engine) plans.
If diesel prices have to be deregulated, the fuel would become dearer by Rs 12 per litre overnight which is absolutely inconceivable at this point. Inflation has still not cooled off and the Budget has done little to address this problem. Any drastic change in diesel prices will only aggravate the situation and the Government will, at best, look at a hike of up to Rs 3 per litre.
A petrol price increase is long overdue and though oil companies have been clamouring for Rs 5/litre, this may likewise be capped at Rs 3 instead. The net result is that the price difference between the fuels will continue to be over Rs 25/litre with petrol being the dearer of the two.
Fuelling demand
In the process, this will only continue to fuel demand for diesel cars which has been the case for some months now. On an average, the diesel version of any model accounts for over 70 per cent of sales. Companies like Honda, which do not have a diesel option for the City or Brio, believe they are being disadvantaged as a result. They can only hope for a substantial price hike in diesel which will drive more customers towards petrol-driven cars.
Differential pricing for diesel is the only way out to ensure a level playing field. This will see car users paying the full price (which would be Rs 58/litre) at retail outlets while the commercial vehicle segment continues to get the subsidy. While this may not be the easiest of business models to implement, it is clear that cheap diesel cannot fuel expensive cars and SUVs any longer.
The Budget also hiked import duty on fully built-up cars to 75 (from 60) per cent. Does this also send a message to the automobile industry that it need not be concerned about any duty concessions in the Indo-EU pact?
For some time now, carmakers have been on pins and needles fearing fully-built European models will have a cheap entry point into India. The Budget may have well buried any such possibility.
Source: The Hindu Business Line - GAI
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