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Economy Feb 28, 2012

Budget: Diesel tax, excise hike give auto industry the jitters

By Sourav Majumdar

The auto sector may be among the sectors not looking forward to the forthcoming Union Budget. Talk of a possible diesel tax, a hike in excise duty and another round of fuel price hikes are threatening to create big problems for the sector.

Although Pawan Goenka, president of auto major Mahindra & Mahindra's automotive and farm equipment sector told CNBC-TV18 earlier on Tuesday that the government would do well not to levy additional hike in duty on diesel cars, talk of additional taxes just a fortnight ahead of the March 16 Budget is bad news for the sector. Goenka is also president of industry body Society of Indian Auto Manufacturers (Siam).

Goenka apart, Heavy Industries Minister Praful Patel also continues to bat against a diesel tax, and has even written to the finance minister requesting him not to impose an additional levy on diesel cars. Patel told CNBC-TV18, also on Tuesday, that diesel was an efficient fuel and its consumption should not be discouraged.

The auto sector is concerned about the persistent talk on hiking of excise and taxes on diesel cars since auto sales have been bleak this fiscal. Reuters

The auto sector is concerned about the persistent talk on hiking of excise and taxes on diesel cars since auto sales have been bleak this fiscal on account of a general slowing down of the economy and high petrol prices. Any further hike in taxes and fuel prices will bring severe headwinds for the sector, auto analysts have warned.

Recommendations of an additional tax of up to Rs 80,000 on diesel cars have been made by the Kirit Parikh Committee and Oil Minister Jaipal Reddy and environmentalists. Analysts reckon if levied, it could result in the cost of a diesel car increasing by up to 20 percent, causing a further dent on the auto industry's outlook in the immediate term.

While there has been an increase in dieselisation of passenger vehicles, there has also been a clamour against abuse of subsidised diesel by passenger cars and SUVs (sports utility vehicles). However, Patel, in his interview to CNBC TV18, ruled out dual pricing of diesel saying it would not be feasible.

With under-recoveries of oil marketing companies on the increase, there is little option before the government other than raising fuel prices once again, after the state elections (Read Firstpost story here).

Brokerage firm Motilal Oswal points out that rising petrol prices and a widening differential between petrol and diesel prices (about Rs 14 currently) in India have resulted in the acceleration of dieselisation in the financial year ending March 2012.

As a result, sales of diesel cars grew by a robust 37 percent or so between April and December 2011. The imposition of a diesel tax and/or increase in diesel prices could impact the consumer's preference for diesel vehicles. A diesel tax of up to Rs 80,000 per car could significantly reduce the attractiveness of diesel cars as the payback period would increase from 2.4 years to 4.4 years.

Further, a Rs 2 per litre hike in diesel prices would result in the break-even usage (for premium-priced diesel vehicles) increasing to about 40,000 km as against about 35,500km currently (versus about 50,000 km last year).

Blow for passenger vehicles
Analysts reckon volume growth in the passenger vehicles segment in the next financial year could be severely jeopardised if these multiple headwinds hit the auto sector around Budget time. Demand for passenger vehicles would be further deferred as a result.

"While a diesel tax would hurt demand for diesel vehicles, increase in excise duty and fuel prices would impact overall demand for both diesel and petrol vehicles," warns the broking firm.

Assuming these developments take place, domestic passenger vehicles volume growth next year is, therefore, estimated to be much lower - flat to about 5 percent - versus current estimates of a much higher 12-15 percent. For a sector battling sluggish sales for some time now, Budget 2012 could well be a decider.

Watch video below:M&M against imposing additional duty on diesel cars

by Sourav Majumdar

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