MUMBAI (Reuters) - Indian automakers heaved a sigh of relief after the union budget did not hike taxes on diesel cars and retained a generous subsidy on the fuel, but companies criticized a rise in excise duty that will trigger an increase in car prices.
Any measures in the budget to specifically make diesel cars more expensive to buy or run might have poured cold water on a segment that has boosted sales even as overall demand slows on high interest rates and rising petrol prices.
"This budget was very, very good for the auto industry," said Vineet Hetamasaria, auto analyst at PINC Research in Mumbai. "Everyone was expecting taxes, and they didn't come."
(For full coverage of the budget, click here)
Tata Motors (TAMO.NS) shares jumped as much as 2.6 percent to their highest-ever price after Finance Minister Pranab Mukherjee's budget speech in parliament, but closed down 1.3 percent as investors worried about an increase in excise duty.
The company said in a statement after the market closed that it would increase the prices of all its passenger and commercial vehicles with immediate effect, in proportion to the increase in excise tax outlined in the budget.
Mukherjee said on Friday that excise duty on cars currently taxed at 22 percent would increase to 24 percent, and excise duty on cars currently taxed at 22 percent with an additional 15,000 rupees per vehicle charge would increase to 27 percent.�
(Budget highlights, click here)
The head of Ford's (F.N) India unit said his company will increase the prices of its cars as a result of the excise duty hike, and criticized the budget's approach to the industry.
"The announcement of a 2 percent increase in excise duty is disappointing and not favorable towards the auto industry," Michael Boneham, president of Ford India said in a statement.
"This will lead to increase in prices of our products and will have negative impact on consumer confidence," he added, without providing details.
Executives at Maruti and General Motors' (GM.N) India unit also said that the excise hikes would result in an increase in prices, without providing specific details.
(Expert views on Budget 2012, click here)
Analysts said they expect car prices to rise by only about 1-2 percent.
Mukherjee also announced a hike in import duty to 75 percent from 60 percent for assembled SUVs and multi-utility cars costing more than $40,000, in a move seen boosting Mahindra & Mahindra, which controls the lion's share of India's SUV market.
Shares in Mahindra ended the day up 3.1 percent at 677.95 rupees. Maruti stock closed up 0.6 percent at 1,374.35 rupees.
Diesel car sales have accelerated to account for about 40 percent of new purchases in India, compared with less than 20 percent a few years ago. The diesel model of Maruti Suzuki's popular new Swift hatchback has a waiting list longer than six months.
A rush to buy vehicles before the budget drove car sales in February to their highest-ever total.
Cutting the diesel subsidy, which makes the fuel about 50 percent cheaper than petrol, is a political hot potato due to diesel's extensive use in India's vast agricultural industry.
Fuel retailers and environmental groups had instead called for an extra excise duty of 81,000 rupees on diesel cars, asserting that they account for 15 percent of the fuel's consumption. Industry groups say the amount is less than 5 percent.
Clarity in the government's stance on the fuel should kickstart investment plans by India's car makers, who were unwilling to splurge on new plants to meet the surging demand until the ambiguity over diesel was resolved.
Overall car sales in India will likely only post marginal growth in the fiscal year that ends this month, but are expected to grow by more than 10 percent in the coming fiscal year, driven by increased salaries and a rapidly growing middle class.
Editing by Aradhana Aravindan