When Pranab Mukherjee rises to present the Budget a month from now, car companies will be among those watching him anxiously. A proposed tax on diesel vehicles could increase prices by 22 per cent, worrying enough to defer ambitious investments in diesel engine factories. The investment plans were prompted by brisk sales of cars that run on this highly subsidised fuel.
Though a similar proposal had come up prior to the Budget last February, auto companies are more anxious this time, as the government looks to reduce its subsidy bill which on diesel stands at Rs 67,000 crore annually. Most car companies will be affected. While Mahindra & Mahindra (M&M), and Tata Motors are holding their breath because they make mostly diesel cars, others such as Maruti Suzuki and Hyundai Motor India Ltd are holding back investments.
“If there is any significant tax that comes on diesel vehicles, it’ll not move demand from diesel to petrol, but it’ll slow down the industry, ”said Pawan Goenka, president (automotive and farm equipment sectors), M&M.
Hyundai, India’s No 2 car maker, has stalled estimated investment of Rs 400 crore for a diesel engine manufacturing facility in Chennai. Others such as Maruti Suzuki and Renault-Nissan are awaiting cues from the Budget for outlining expansion plans.
“In the last few months almost 50 per cent of the vehicles sold were diesel propelled. In fact if we take only those vehicles in which the diesel option is available it is close to 83 per cent,” said Shashank Srivastava, chief general manager (marketing), Maruti Suzuki, India’s largest car company. “Any long-term investment in diesel capacity by auto companies will be clear only after there is clarity on the fuel policy direction.”
Shinzo Nakanishi, managing director of Maruti Suzuki, said, “I hope the government does not accept the proposal because the proposed rise is too much. We are not clear about the quantum of rise either.” He had earlier indicated that investments to the tune of Rs 1,000 crore may have to be made to set up a plant to roll out 100,000 engines annually.
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Maruti signed a deal with Fiat last month to source 8,300 diesel engines a month. Though supplies have begun, the companies are cautious about raising capacity. Diesel variants of hatchbacks Swift, Ritz and sedans DZire, SX4 at present account for 30 per cent of monthly sales for Maruti Suzuki.
Greater demand
Industry estimates say diesel variants accounted for 28 per cent of passenger vehicle sales in the last financial year. With petrol prices rising five times in the current financial year, the differential between the two fuels now stand at a whopping Rs 25.51 per litre, up from Rs 10 in April 2010, making an increasing number of consumers opt for diesel cars.
For Hyundai, a diesel engine plant would additionally de-risk of exposure to adverse foreign exchange fluctuations seen in recent times. Abdul Majeed, partner and leader (automotive practice), Price-waterhouseCoopers said, “The rupee depreciation translates into rising import bills for manufacturers who are already battling high input costs. Setting up shop locally is always better for stabilising production costs.”
Hyundai currently imports diesel engines for premium hatchback i20, midsize sedan Verna and sports utility vehicle Santa Fe. Diesel vehicles contribute a fifth to the sales of the company. “We have reconsidered investment on the diesel engine plant because of lack of clarity in fuel policy”, informed Arvind Saxena, director (marketing and sales), HMIL.
French car maker Renault has commenced a feasibility study to set up a diesel engine plant at Oragadam, Chennai. The plant would initially have the capacity to manufacture 200,000 units per annum.
A senior official at the company said, “We offer only diesel variants of the Pulse and the Koleos. Duster, too, would be available in diesel being an SUV. It is necessary for us to have a diesel engine manufacturing facility. But unless it becomes clear whether additional taxes are likely to be levied on diesel vehicles and whether the fuel is likely to be decontrolled by the government, it would be risky to take a call.”