Budget 2012-13 (Automobile): More negatives than positives



The key measure to watch out for the auto sector is on the excise duty front. First, the possibility of across-the-board excise duty hikes to pre-stimulus levels. That would mean a two percentage point increase from the current 10 per cent for small cars and two-wheelers and 22 per cent for sedans and utility vehicles (UVs).

The fact that government's finances are in bad shape strengthens the possibility of this hike. The odds against it is the moderation witnessed in the auto industry growth this year. If it does happen, auto makers are in for a challenge. Just when they are expecting a boost to sales from the waning of high interest rates, they may have to contend with a lull in sales from increased prices.

But more contentious is the likely disincentive for diesel cars and utility vehicles. Ranging from whether it will happen and the different ways in which it can come about (i.e. through excise hikes or a hike by a certain sum of rupees or both)  to what could be the quantum of increase, the guesses seem never-ending.

Arguments against the imposition come from the Ministry of Heavy Industries and the Society of Indian Automobile Manufacturers. They suggest that the policy of taxing diesel cars extra will not help much in reducing the diesel subsidy burden as taxis, cars and UVs account only for 5 per cent of the diesel consumption.

The Oil Ministry, in turn, bats for this proposal, as this is something it can do to reduce diesel subsidies without stoking inflation.

Whatever be it, if this is proposed on Budget day, it would have more serious implications for the industry unlike the across-the-board excise hike whose impact would, at best, be temporary. With the differential between diesel and petrol prices widening in recent times, the country has had a clear preference for diesel cars and UVs.

Considering this, many companies have committed finances to expanding their diesel product-line or production capacities for existing diesel vehicles or have invested in diesel engine capabilities. Their growth plans might then have to be re-worked. Overall, for the auto industry, negative expectations outweigh the positives, which may come in the form of some concessions to electric vehicles.

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