Top executives from the leading car making companies met officials from Union Finance Ministry to discuss a possible hike in the tax on diesel cars. Most of the car companies are strongly opposing this move as it may further hamper the already dwindling fortunes of the car industry.
In India, the yearly consumption of diesel translates into 63 million tonne, whereas at 15 million tonne, petrol consumption is merely 1/4th of the diesel consumption. At the same time, out of the total car sales volume in the country, diesel run cars account for 47% and petrol cars form 53% of the sales pie. In light of these facts, car makers suggested that the government should raise the price of the diesel and not the tax on the vehicles. In a response to the steep price hike of petrol and customer shift towards diesel cars, major car makers operating in India have invested considerable amounts in their plants to boost the production capacity of diesel cars.
President, Automotive division, Mahindra and Mahindra, said, “The additional levy on diesel cars will kill demand. If you were to impose additional tax on diesel cars by 5%, the Government will be able to garner mere Rs. 2,500 crores to Rs. 6,000 crores; increase in diesel fuel price by just Rs. 1 will result in higher proceeds of Rs. 6,000 crores for the government.” Notably, Mahindra & Mahindra (M&M) is the largest manufacturer of Sports Utility Vehicles (SUV) with most of its portfolio being powered by diesel.
Mahindra accrues 99% of its sales coming from diesel vehicles. It has several other diesel models lined up to be launched, including Mini Xylo, the sub-4 metre Verito hatchback, Ssangyong Rexton and Maxximo hardtop van. The company may witness slow demand and may bear the worst impact of the hike if it chooses not to pass on the same to the customers, thus facing low profit margins. M&M may even rethink its planned investments in the country; however, it can consider establishing a petrol powertrain unit manufacturing plans to insulate itself from possible damage.
Another company which has two new diesel models waiting to be launched is Tata Motors, as its Safari Storme and Nano Diesel are in the pipeline. Followed by low demand and profit margin, it may concentrate more upon its petrol line-up. 70% of its total sales volumes come from diesel vehicles.
The largest car manufacturer in the country, Maruti Suzuki, generates 48% of its total sales from diesel models and has a diesel-run compact SUV on its agenda. The proposed hike will help control the already stunted demand for its petrol models like Alto and WagonR. The profit margin of the company, which is already under strain, may experience further stress and may see the waiting period for its diesel models go down. In order to hedge these outcomes, Maruti may exploit its huge Research and Development (R&D) base to explore more hybrid and electric car models and can focus more upon mileage.
Ford and Toyota earn 80-85% of their revenues from diesel vehicles and both have one SUV each planned to be launched. The impending tax increment may affect them as well, considering the large number of sales generated by the diesel line-up. Hyundai, with 22% sales volumes generated by diesel cars, may also witness reduction in waiting period for its popular models. These companies may invest more into development of better fuel efficient cars to avoid any drastic impact.
