Politics to drive timing of Maruti factory plans

With India's economy hitting a rough patch and political gridlock stalling reforms, the country's largest carmaker will decide only after parliament's budget session in March on when to break ground on a new $1 billion manufacturing complex.

Maruti Suzuki is in talks to buy two 500-acre tracts of land in Gujarat but is worried that slowing economic growth will crimp demand for cars -- even as global players crowd into the market and add capacity.

"What options do I have? I can't proceed on the basis that we are going to go back to 9% economic growth and 15% growth in the car market," RC Bhargava, the chairman of India's dominant carmaker, told Reuters.

India's economy is expected to struggle to grow by about 7% in the fiscal year that ends in March, and the outlook for the year beyond hinges in part on whether New Delhi pushes through reforms that have long been stalled by political gridlock.

Parliament will hold its budget session in March, after elections in a handful of states including Uttar Pradesh, India's most populous, which will be key to determining whether the ruling Congress can regain the political initiative.

Rising inflation and fuel prices combined with slowing economic growth have battered car sales, which an industry body expects to be flat in the current fiscal year after surging 30% in the year that ended in March 2011.

"Car sales really track the GDP growth. If you have a good GDP growth, you have good car sales," said Bhargava, adding that 7% economic growth translates to roughly 10% growth in auto sales in India.

He said the company has not yet made a decision on when to break ground in Gujarat, where it plans to build three plants in phases at a cost of Rs 6,000 crore that would increase production by around 2,700 vehicles per day.

"We'll probably do that after this year's budget and after we can make an assessment how the economy is going to grow and how the car market is likely to grow," he said.

Bhargava noted that numerous reforms remained shelved, including Goods and Services Tax, Direct Tax Code, Foreign Direct Investment in retail, Banking and Pension reform, and a massive nationwide identity card scheme.

"All of these are at the moment stuck. So what progress we have there -- that will also indicate whether the government and the opposition are keen on accelerating GDP growth or not," he said, adding that the government has little firepower to use fiscal stimulus to spur growth.

"They can't do much in the way of giving any tax cuts or stimulus," he said on the sidelines of the India Auto Expo.

Until about a year ago Maruti, which is 54.2% owned by Japan's Suzuki Motor, sold every other car in India but its market share has been eroded by growing competition as local and foreign rivals, such as the Renault SA/Nissan Motor Co alliance, ramp up capacity.

While Maruti enjoys waiting lists as long as six months for its most popular model, the diesel version of the Swift hatchback, Bhargava said that if the industry's investment plans now on the drawing board all come to fruition, India faces a capacity glut.

"If they all come in, then I'm sure, nationally, total installed capacity could be 30-40% higher than demand," he said.

(US$1 = 52.67)