India SUV Boom Threatened as Government Mulls Diesel Tax

SUV India
Workers assemble a Mahindra & Mahindra Ltd. XUV500 sports utility vehicle at the company's factory in Pune, India, on Sept. 29, 2011. Photographer: Dhiraj Singh/Bloomberg

Diesel cars have become so popular in India that people are willing to do almost anything to get one.

A woman sent Mahindra & Mahindra Ltd. Vice Chairman Anand Mahindra an e-mail last month, begging to let her dying father cut the front of the line for the sold-out XUV500, Mahindra’s latest luxury SUV. Mayank Pareek, head of sales at top Indian carmaker Maruti Suzuki India Ltd., says hardly a day goes by without him getting asked to pull similar strings for the diesel variants of the Swift hatchback or Dzire sedan.

Diesel-powered cars have led Indian auto sales to record highs for two straight months as gasoline has become as much as 60 percent more expensive in Asia’s third-largest auto market. That dynamic may soon change if the government imposes taxes on diesel when it announces its fiscal budget on March 16.

If the taxes are high enough, “it will hit demand very hard,” said Deepesh Rathore, the New Delhi based managing director at research firm IHS Automotive in India.

Fueling speculation of a diesel tax has been a steady stream of comments from Indian leaders pointing in that direction. Prime Minister Manmohan Singh said late last year that India should phase out fuel subsidies and Finance Minister Pranab Mukherjee told Parliament in August the government was looking at ways of reducing the subsidy on diesel.

There is a “high” probability the government will disclose duties on diesel vehicles when the budget is announced, Ambrish Mishra and Navin Matta, analysts at Daiwa Securities Group Inc., wrote in a Feb. 28 report.

‘No Clue’

While demand for diesel vehicles would probably withstand extra taxes of 6 percent, going beyond that would drive away consumers and a 16 percent tax would “entirely wipe out” diesel’s advantage, the Daiwa analysts wrote.

Not everyone worries that diesel cars may lose their edge.

“No one has a clue on what the government is thinking,” said Joseph George, an analyst at IIFL.

India’s fuel pricing policy has made gasoline 60 percent more expensive than diesel, compared with 28 percent in June 2010, when the government lifted price controls on gasoline. The government continues to subsidize diesel, which is used by freight companies and accounts for a higher weight in India’s inflation index.

The imbalance has led April-to-February sales of diesel cars in India to rise more than 20 percent from a year earlier, while deliveries of gasoline vehicles declined about 15 percent, according to Umesh Karne, an analyst with Brics Securities Ltd. in Mumbai.

Waiting Lists

The waiting list for Maruti Suzuki’s diesel models are as long as seven months, Pareek at Maruti Suzuki said.

Among the biggest beneficiaries are sport-utility and cross-over utility vehicles, which in India are predominantly equipped with diesel engines. Sales in the category climbed 15 percent to 326,824 units in the first 11 months of the fiscal year ending March, led by Mahindra, the nation’s top maker of sport-utility vehicles, according to the Society of Indian Automobile Manufacturers.

By comparison, deliveries of passenger cars excluding SUVs gained 0.3 percent, mainly because of dwindling demand for automobiles that run on gasoline, according to SIAM.

Gasoline-powered cars may not recoup the sales they ceded even if the government makes diesel less appealing.

“When a buyer moves to a utility vehicle from a sedan, he normally doesn’t go back,” said Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd. “Buyers of utility vehicles will have no choice but to pay if the government decides to impose a higher tax on diesel.”

Safety Perception

SUVs are particularly popular in India because they are perceived as being safer and more versatile on the nation’s unkept roads, IHS Automotive’s Rathore said.

“Until now, there wasn’t really any choice apart from the Tata Safari,” he said. “Now there’s more choice and that is driving demand. It also helps that they are diesel, but the primary reason remains the fact that there’s so much choice in the market.”

For now, companies such as Mahindra are in the driver’s seat. The company’s vice chairman said he recently realized to what lengths people will go to get a Mahindra SUV when he received the e-mail on behalf of a customer’s dying parent.

“My father is suffering from cancer,” according to a copy of the e-mail provided by the company. “As a special case I would request you to consider his application out of turn for assured delivery.”

The company said it granted the man priority over more than 25,000 applicants to buy the latest XUV500 after the verifying medical records attached in the e-mail and visiting the family. The sender of the e-mail didn’t respond to Bloomberg queries seeking comment.

“I was shocked when I saw the e-mail,” Mahindra said. “We were overwhelmed by the bookings for the XUV500. People asked us if we purposely planned to keep the production low to create a buzz about it. We seriously had no idea it would be this popular.”

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