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Increase in prices of diesel, petrol could hurt sales of cars

Increase in prices of diesel, petrol could hurt sales of cars
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First Published: Fri, Feb 05 2010. 12 00 AM IST

Demanding times: Car makers say Parikh panel proposals “will hurt”. Auto firms have been raising capacities due to a recent demand surge. Ramesh Pathania / Mint
Demanding times: Car makers say Parikh panel proposals “will hurt”. Auto firms have been raising capacities due to a recent demand surge. Ramesh Pathania / Mint
Updated: Fri, Feb 05 2010. 12 00 AM IST
Mumbai: The Kirit Parikh panel’s recommendations to hike auto fuel prices and raise the excise duty on diesel-run vehicles could hurt the plans of Indian auto makers to increase production capacity.
The committee led by the former Planning Commission member on Wednesday suggested raising the prices of diesel and petrol by Rs2.33 and Rs4.72 a litre, respectively. It also recommended additional excise duty of Rs80,000 on diesel-driven passenger vehicles.
Demanding times: Car makers say Parikh panel proposals “will hurt”. Auto firms have been raising capacities due to a recent demand surge. Ramesh Pathania / Mint
Diesel-run small cars of 1,200cc or less currently attract excise duty of 8%, and larger vehicles, 12%. If the panel’s suggestions are adopted, auto makers will likely pass on any additional cost to their buyers.
Increasing demand for diesel-powered vehicles has led auto makers such as Maruti Suzuki India Ltd , Mahindra and Mahindra Ltd and Ford India Pvt. Ltd to make large investments in the technology.
If the capacity created remains unused “it will hurt,” said R.C. Bhargava, chairman, Maruti Suzuki, India’s largest car maker by volume. “While I can understand what the intention is, the action should not translate into something which is disruptive.”
Sales of diesel-run vehicles account for 35-40% of Indian car makers’ total sales.
Diesel cars account for 30% of Maruti’s total sales. Its engine factory in Manesar near Gurgaon has an annual capacity of 100,000 units. The firm had planned to increase this to 300,000 this year in anticipation of higher demand.
“The cost of ownership goes up with the increase in the excise duty and this will potentially lead to a contraction in volumes,” said P. Balendran, vice president, corporate affairs, at General Motors India.
A spokesperson for Tata Motors Ltd declined to comment. Pawan Goenka, president (automotive sector), Mahindra and Mahindra, could not be reached as he was travelling.
The Parikh committee has taken a very “simplistic view,” said a senior official at the Society of Industry Automobile Manufacturers, or Siam, an industry lobby group. He declined to be named as he is not Siam’s official spokesperson.
He added that as carbon dioxide emissions from diesel are lower than from petrol, raising fuel prices or the excise duty could delay India’s aim to cut its emissions by 20-25% by 2020 from 2005 levels.
Umesh Karne, an analyst at BRIC Securities Ltd, said a price hike on diesel-run vehicles would erode any potential gains from buying these, given that diesel on average costs Rs10-12 less than petrol. ”One will see the sales of diesel vehicles dipping,” he said.
Kaushal Maroo, an analyst at Religare Markets Capital Ltd, said commercial vehicle sales, which have just started recovering from the downturn, will suffer the most from a hike in the price of diesel.
“Owing to a sluggish demand, freight rates have remained static. An increase in the diesel price will hit the truckers’ profitability and hence deter them from new vehicle purchase(s),” he said.
The Bombay Stock Exchange’s (BSE) auto index, comprising 14 firms, dropped 2.1% on a day the benchmark Sensex index fell 1.64% to close at 16224.95 points.
shally.s@livemint.com
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First Published: Fri, Feb 05 2010. 12 00 AM IST