Debate on car course

New Delhi, Jan. 17: Car makers are going full throttle with their plans for diesel models and engines even as the government today proposed recurring diesel price rises to bottle the country's burgeoning fiscal deficit.

Analysts, however, believe that industry optimism may prove beneficial only in the short term ' as long as the gap between petrol and diesel prices persist.

Gradually, the price differences between the fuels should get bridged, which will give petrol cars an edge over diesel models, the analysts argued.

At present, diesel models contribute around 60 per cent to total sales.

Maruti Suzuki is bullish on diesel. "There will not be an immediate impact on the sale of our diesel cars and capacity expansion plans," chairman R.C. Bhargava said.

He said Maruti had a waiting list for diesel models, and the company's ability to sell was constrained by its manufacturing capacity and not by the government's subsidy.

Maruti derives its optimism from some analysts who expect the price differential to exist for at least two years.

The company plans to manufacture 150,000 diesel engines at its Gurgaon facility by the end of September, which will be doubled to 300,000 by the following year.

Industry players said the removal of price difference between the two fuels would lead to a pick-up in overall demand.

"The market distortion towards diesel vehicles was because of the price differential. Now customers will be able to choose a vehicle based on their motoring needs instead of a fuel subsidy," said Jnaneswar Sen, senior vice-president (marketing), Honda Siel Cars India.

Honda, which will introduce its first diesel model Amaze in the first half of this year, will not do a rethink on its line-up either. "We already have a very strong petrol line-up and with the addition of diesel models, we will be ready to offer a complete spectrum of cars to the buyer," Sen said.

The industry has been lobbying for the reduction in the fuel price difference calling it "unsustainable". Almost all SUVs and jeeps are diesel-driven along with many premium cars sold by Audi and BMW. It has, however, opposed proposals to hike excise duty on diesel cars or raise road taxes on the ground that it will lead to a further slump in the market, which has been posting slow or negative growth last year.

Last fiscal, car sales grew just 2.19 per cent. Companies expect sales to grow between 1 per cent and 4 per cent this year.

"Mahindra has always been supportive of narrowing the gap between diesel and petrol prices. An increase in diesel price will have very little impact on the sales of utility vehicles but may slightly shift the demand to petrol in the passenger car segment in the small and mid-range," said Pawan Goenka, president (automotive and farm equipment), MandM Ltd.

He cautioned that an increase of beyond Rs 5 in the diesel price might start impacting industry volume.

"Immediately there may be an impact on buyer sentiment and overall demand for cars may moderate. In the long term, diesel vehicles may account for only 30 per cent of total sales like it was three years ago," said Abdul Majeed, analyst at consultancy firm PwC.