Car and sports utility vehicle manufacturer have welcomed the government's latest decision to allow oil marketing companies (OMCs) to alter price of diesel at their will even as this means a deferment of special tax on diesel vehicles.
Demand for diesel cars, which now account for 58% of total passenger vehicle sales in India every month, has hit the roof even as manufacturers continue to introduce new models and variants strapped with a diesel engine.
Pawan Goenka, president-automotive and farm equipment sector, Mahindra & Mahindra said, “We welcome the statement made today by the petroleum ministry on diesel fuel price increase. Mahindra has always been supportive of narrowing the gap between diesel and petrol fuel prices by another Rs 5/litre. In our opinion such an increase in diesel price will have very little impact on UV and CV demand but may slightly shift demand to petrol in the passenger car segment in the small and mid-range."
More than 95% of Mahindra's product line-up including utility vehicles, cars and sports utility vehicles runs on diesel engines. The Mumbai-based company has outpaced the industry growth in volumes with a growth of nearly 30% in the April-December period this year as against the industry's growth of eight%.
"An increase in diesel price beyond Rs 5 may start impacting overall industry volume”, added Goenka. A recent spurt was seen in demand for small petrol cars when government hiked the price of diesel in September last year.
Last financial year the contribution of diesel passenger vehicles to overall passenger vehicle sales stood at 47% thereafter demand has continued to move skywards. Almost every car maker in the industry has lined up new launches including compact cars, sedans, SUV, MPVs and premium SUVs in the coming months.
This move will remove the distortion between diesel and petrol prices in the market. It allow the oil marketing companies to bring the price of diesel much closer to market rates, said a senior executive of the Society of Indian Automobile Manufacturers.
A number of companies such as Fiat, Maruti Suzuki, Hyundai, M&M and Honda to name a few have made or are preparing to make investments for setting up new diesel engine producing facilities or increasing the capacity of the existing ones.
Maruti has ruled out any changes to its plans of launching a Rs 1,700 crore diesel engine facility, which is being constructed inside the Gurgaon manufacturing facility. The facility which will have an initial capacity to produce 1.5 lakh engines every year, will come on stream by mid 2013. The company intends to a double this capacity by 2014 to 3 lakh units.
A senior Maruti official said, "Any hike now in diesel prices will not impact the demand for diesel vehicle significantly. We are expecting demand to further rise from here. Moreover the hike will not have any impact on our expansion plans".
The government was contemplating an imposition of a special tax on diesel-run passenger vehicles, aimed at discouraging their demand. There was a unanimous opposition from the industry against this proposal.
Though retail price of diesel is lower compared to petrol it is also more fuel efficient than petrol. Manufacturers believe that the government may be forced to restrict complete deregulation of diesel which may work in favour their sales.